2014 has been a disappointing year for Boeing (NYSE:BA) bulls like myself as shares have fallen 10.6% year to date. However, we got an early Christmas present on Monday evening when Boeing announced a dividend hike and new buyback program (press release available here). This news sent shares jumping about $3 to $125 after hours. With its massive backlog, I believe the Boeing story is still in the early innings, and there will be growing dividends for years to come. At less than 16x earnings, I would be a buyer of Boeing going into 2015.
The company's board authorized a 25% hike to the quarterly dividend to $0.91 from $0.73. The board also authorized a new $12 billion buyback that replaces the existing plan, which had $4.8 billion remaining. Boeing has completed its repurchases in 2014, which totaled $6 billion. Boeing will begin buying back stock under this new program starting in January. The program is open-ended and is expect to last two or three years. Given the pace of repurchases in 2014, I expect this authorization to last around two years with about $5.5 billion-$6.5 billion to be bought back next year. This will amount to about 6% of outstanding shares, which will further accelerate EPS growth.
Importantly, Boeing has the ability to sustainably generate cash flow that can cover these capital returns. Boeing's backlog stands at $490 billion (all financial and operating data available here). This backlog is driven by blockbuster new planes like the Dreamliner and 777x, which provide airlines with much more fuel efficiency. Thanks to lower fuel costs, these planes will generate substantial savings over their lifespan, which has driven their popularity. With this backlog, Boeing has tremendous revenue visibility, and it can run its factories at full capacity through 2020 without receiving a single net new order.
Even though Boeing operates in a cyclical business, this backlog gives the company crystal-clear revenue visibility. We are in the midst of an aerospace boom thanks to innovative products. Moreover, consolidation among the carriers has removed excess capacity, allowing them to generate substantial profitability. Improved financials will allow the carriers to upgrade their fleet, boosting demand for Boeing's products. The only constraint on Boeing's performance is on the supply side. Clearly, there is massive demand for Boeing planes as evidenced by the backlog.
Boeing is now adding capacity, expanding assembly lines, and improving its supply chain management to turn out more planes. As Boeing ads capacity, it should begin delivering more planes, hopefully 120-125 Dreamliners and over 750 planes in total next year. Increasing capacity will boost Boeing's revenue, earnings, and cash flow. I expect Boeing to earn $8.00-$8.20 next year, giving the stock a forward multiple of 15.2x. With its massive backlog, this is an extremely attractive valuation. At this earnings rate, Boeing should generate about $7 billion in free cash flow. With $1.2 billion in net cash, Boeing can easily afford its capital return plan, which will cost $8 billion-$9 billion next year. Free cash flow will cover most of this sum, and Boeing can afford to add some net debt to its capital structure, given the visibility of its revenue.
Clearly, shareholders should be glad Boeing will be returning even more to them in 2015. Boeing is in the midst of massive growth, powered by its nearly $500 billion backlog. Going forward, Boeing yields roughly 3% and will be buying back about $6 billion in stock. Thanks to tremendous new products and investments in additional capacity, Boeing will be able to generate 5%-12% earnings growth through 2019. Below $130, I would be an aggressive buyer of BA, and I expect shares to perform much better in 2015, likely getting towards $150.
Disclosure: The author is long BA.
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