Boeing (NYSE: BA) just caught my attention with its newly announced plan to return cash to shareholders. It got me interested in the company enough to do some further research. I like what I found, and now have several reasons why I'm seriously considering initiating a position in the name.
It's all about the dividends and buybacks
The company just bumped its dividend by an impressive 25%, to $0.91 from $0.73. This adds to an already impressive string of increases, and shares now yield 3%.
Boeing also announced that it's increasing its buybacks to a total of $12 billion, up from the previously planned $10 billion. The company's shareholder returns are impressive, and are also backed by a strong balance sheet and strong fundamentals.
Exceeding earnings estimates
The company beat estimates on both the top and bottom lines when it last reported on October 22. It also raised its full year earnings guidance. The company also reported an impressive backlog totaling $490 billion, composed of a record $430 billion backlog for 5,500 jetliners and a $60 billion defense backlog.
There was some concern that led to a drop in the company's share price at the time it reported. This was mostly due to an 86% drop in free cash flow, largely as a result of pension expenses and payments made in advance to Dreamliner suppliers. Boeing CFO Greg Smith insisted the 787 would be "cash positive" in 2015, however.
The company also anticipates a combination of both growth and replacement needs over the next two decades, driving global demand for nearly 37,000 new commercial airplanes. The company thinks its technologically advanced airplanes will largely help fill this strong demand going forward. Adding to this fact is an already strong backlog that "underpins" Boeing's "outlook for sustained growth in the years ahead," according to its CEO W. James McNerney.
What about dropping oil prices?
During the last conference call, oil prices were discussed in the Q&A session. While intuitively it would seem lower oil prices would help a company selling airplanes, this might not actually be the case.
According to the company's CFO, deliveries have historically been geared towards 75% growth and 20%-25% replacement, but in the current environment its been more weighted towards half replacement and half growth. This trend is expected to continue as well, as the company's new technology continues to roll out. Smith explained:
For example, you're seeing it on the 787 today as it replaces the older medium sized wide-bodies and you're beginning to see it on the 777 as we spiral the number of those technologies now into the 777, you are beginning to see it on the MAX and so I think that's going to continue probably for another decade or so with a more robust mix of replacement versus growth which is the good thing about us in the sense that it will keep us disconnected from over all GDP trends
This means that more older planes are being replaced than before, and an issue was raised regarding elevated fuel prices being a driver of this. Replacing older models with newer, fuel-efficient ones makes sense when fuel is expensive, but maybe not as much when prices are falling. Smith answered questions regarding "demand destruction" and at what brent crude price this would start to occur by stating:
Yes. I mean, we would not see much impact at $70, okay. And it would have to be much difference than $70.
The price of Oil has dropped way below that number, so going forward this could be an issue for the company's replacement sales. CEO McNerney said:
I mean, this generation of new planes that we're introducing anywhere from 16% to 24% more efficient than the planes they are replacing, this replacement generation has more compelling numbers associated with than any generation I've seen since the 707.
He also echoed Smith by stating that oil would have to go "a long way" from where prices were in October to be detrimental, but this is an issue I will be watching closely next conference call. Especially while oil continues to be in what looks like a free-fall.
A strong balance sheet to go with reasonable valuations
On a more positive note, Boeing's balance sheet looks strong and liquid, and if the company does get its free cash flow in-check during 2015, there should be no reason why the company can't attract a higher multiple.
The company currently carries about $10 billion in cash on its books compared to a little under $9 billion in debt. A current ratio of 1.23 indicates ample liquidity and the company's debt/equity ratio of 0.61 means the company's capital structure isn't too debt-heavy. Before the recent dividend increase, the company's payout ratio sat at about 35% of this year's expected earnings. It's since jumped to an estimated 43.5% of its expected 2014 earnings, or 42% on next year's expected earnings. It appears the dividend is perfectly safe and further increases are easily sustainable.
Shares currently trade at roughly 17.5 times earnings (compared to an industry average of around 19.28 times earnings) and only 14 times forward earnings. Its price/sales and PEG ratios of 1.35 and 0.96 also compare favorably to the industry averages of 1.50 and 1.15, respectively.
The bottom line
When it comes to shares of Boeing, admittedly the thing that caught my attention the most were the recent dividend increases. The company's last increase before this most recent one was an impressive 50% last time as well. While this monstrous dividend growth will not continue forever, the company's current yield of 3% and reasonable valuations in relation to earnings make me want to begin to layer into a position.
I am also considering swapping out my shares of General Electric for shares of Boeing, especially after GE's miniscule 5% dividend increase, but may give it another quarter or two to see how things shake out. Boeing appears to be a solid pick going forward, however, not only for the dividend, but also for capital appreciation.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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