Boeing (NYSE:BA), the largest manufacturer of commercial aircraft in the world, is a buy for the total return growth investor. The management of BA is good and has continued to grow the business by using its cash to expand and add to their existing airplane family. Boeing is 13.3% of The Good Business Portfolio, my IRA portfolio of good business companies that are balanced among all styles of investing. BA has had great times recently and has been slow the previous three years. This is just the beginning with Boeing as they continue to grow with the need for new and better aircraft. Cash flow is increasing on the 787, and soon the KC-46A program will bring in more cash this summer.
If you want details on individual Boeing aircraft parameters, please read the articles by Dhierin Bechai he is the most detailed contributor on Boeing and the commercial aircraft market. I suggest you read his articles in addition to mine if you own Boeing or are thinking of buying now.
When I scanned the five-year chart, Boeing has a great chart going up, and to the right in a steady, strong slope in 2013 and 2017, it hit a three year period of flat price from 2014-2016. Boeing really likes a good world economy. The present downturn in the market creates a buying opportunity to buy Boeing 6% below the company high price.
BA data by YCharts
Fundamentals of Boeing will be reviewed in the following topics below.
- The Good Business Portfolio Guidelines
- Total Return And Yearly Dividend
- Last Quarter's Earnings
- Company Business
- Takeaways
- Recent Portfolio Changes.
I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.
Good Business Portfolio Guidelines
Boeing passes 11 of 11 Good Business Portfolio Guideline, a good score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.
- Boeing does meet my dividend guideline of having dividends increase for 7 of the last ten years and having a minimum of 1% yield, with eight years of increasing dividends and a 2.1% yield. Boeing is, therefore, a fair choice for the dividend income investor looking over the last ten years. The recent five year average payout ratio is moderate at 50% and increasing. After paying the dividend, this leaves plenty of cash remaining for investment in expanding the business by developing new aircraft, increasing the dividend and buying back shares.
- I have a capitalization guideline where the capitalization must be greater than $7 Billion. BA easily passes this guideline. BA is a large-cap company with a capitalization of $203 Billion. Boeing 2018 projected cash flow at $15 Billion is great allowing the company to have the means for company growth and increased dividends.
- I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.2% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.1%. The one-year forward CAGR of 14.0% easily meets my guideline requirement. This good future growth for Boeing can continue its uptrend benefiting from the continued growth of the United States and foreign economies.
- My total return guideline is that total return must be greater than the Dow's total return over my test period. BA passes this guideline since the total return is 169.81%, more than the Dow's total return of 49.27%. Looking back five years, $10,000 invested five years ago would now be worth over $50,700 today. This makes Boeing a great investment for the total return investor looking back, that has future growth as the economy continues to grow and the need for more fuel-efficient aircraft are needed. As an added plus we have President Trump cutting corporate taxes (both domestic and foreign) which will increase earnings significantly.
- One of my guidelines is that the S&P rating must be three stars or better. BA's S&P CFRA rating is four stars or buy with a recently increased target price to $405, passing the guideline. BA's price is presently 17% below the target. BA is under the target price at present and has a high PE of 24, making BA a fair buy at this entry point if you are an investor that wants great future total return growth and an above average increasing dividend.
- One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is strong, above average yield and increasing cash flow makes BA a good business to own for income and growth long term. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business and also generates a fair income stream. Most of all what makes BA interesting is the potential long-term growth as the need for more fuel efficient aircraft is required and you have an increasing dividend for the dividend growth investor.
Total Return And Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Boeing beats big against the Dow baseline in my 50.0-month test compared to the Dow average. I chose the 50.0 month test period (starting January 1, 2014, and ending to date) because it includes the great year of 2017, and other years that had fair and bad performance. The great total return of 169.81% makes Boeing a great investment for the total return investor that also wants a steady increasing income. BA has an above average dividend yield of 2.1% and has had increases for eight of the past ten years making BA also a good choice for the dividend income investor. The Dividend was increased in December 2017 to $1.71/Qtr. from $1.42 or a 20% increase showing how BA is returning value to the stockholders.
DOW's 50.0 month total return baseline is 49.27%
Company Name | 50.0 Month total return | The difference from DOW baseline | Yearly Dividend percentage |
Boeing | +169.81% | +120.54% | 2.1% |
Last Quarter's Earnings
For the last quarter on January 31, 2018, Boeing reported earnings that beat expected by $0.15 at $3.04 and compared to last year at $2.47 (both excluding special items). Total revenue was higher at $25.4 Billion more than a year ago by 8.1% year over year and beat expected revenue by 770 Million. This was a good report with bottom line beating expected and the top line is increasing and having a good increase compared with last year after excluding the special items. The next earnings report will be out in late April 2018 and is expected to be $2.64 compared to last year at $2.34, a nice gain.
The graphic below shows the achievements of the last year 2017.
Source: Boeing earnings call slides
Business Overview
Boeing is the largest manufacturer of commercial aircraft worldwide and also has a significant military aerospace business.
As per Reuters
Boeing is an aerospace company. The Company's segments include Commercial Airplanes; Defense, Space & Security (BDS), such as Boeing Military Aircraft (BMA), Network & Space Systems (N&SS) and Global Services & Support (GS&S), and Boeing Capital (BCC). The Commercial Airplanes segment develops, produces and markets commercial jet aircraft and provides related support services, to the commercial airline industry. The Commercial Airplanes segment also produces commercial aircraft and offers a family of commercial jetliners. The BDS segment's operations involve research, development, production, modification, and support of the products and related systems. The BMA segment is engaged in the research, development, production, and modification of manned and unmanned military aircraft and weapons systems. The BCC segment's portfolio consists of equipment under operating leases, finance leases, notes, and other receivables, assets held for sale or re-lease and investments."
Overall Boeing is a great business with 14% CAGR projected growth as the worldwide economy grows going forward with the increasing need for more new aircraft. The good earnings and revenue growth provides BA the capability to continue its growth by increasing earnings as the cash flow increases with gains from the 787, 777 and KC-46A programs.
The graphic below shows the cash flow growth for the past year, which is the driver for shareholder gain going forward.
Source: Boeing earnings call slides
Also as a tailwind, we have President Trump lowering corporate taxes on income. As the corporation tax rate is lowered earnings of Boeing business income have increased going forward.
The FED has kept interest rates low for some years, and I believe that they will not raise the rates four times this year, but will go slow at 2-3 for 2018, which should help keep the economy on a growth path. If infrastructure spending can be increased, this will even increase the United States growth going forward with better economics for the consumer. The recent market volatility may slow down the FED.
From November 1, 2017, earnings call Dennis A. Muilenburg (CEO, chairman, and president) said
Let me begin today with a brief overview of our 2017 operating performance.
Thanks to the dedicated efforts of employees throughout our company, Boeing delivered 2017 finance results that included record earnings, record cash flow and record commercial aircraft deliveries. Furthermore, all three of our businesses increased their backlog in 2017. We sharpened our focus on profitable, sustained long-term growth strategies.
Disciplined execution of our production and development programs, delivering greater lifecycle value, including growing our services business and driving further quality and productivity gains across the enterprise. We also demonstrated our commitment to our customers and to ongoing investment in our people and our business, well, once again returning significant value to our shareholders.
For the full-year, we generated record operating cash flow of $13.3 billion. We repurchased 46.1 million shares or $9.2 billion and made dividend payments totaling $3.4 billion in 2017. In December, we reinforced our commitment to returning value to shareholders as our Board of Directors authorized our new $18 billion share repurchase program and a 20% increase in our quarterly dividend. The increases are part of our balanced cash deployment strategy and reflect the confidence we have in our strong line of products and services and the long-term outlook for the business.
In the quarter we received FAA certification for the 767-2C aircraft, verifying that the fundamental design of the KC-46 Tanker is safe and reliable. This is a key building block for the program as it retires risk and builds confidence as we continue our test efforts and work to complete the next phase of certification. We continue to make steady progress, closing out technical risk on the path to final certification and to delivering the first 18 tankers this year. We remain confident in the long-term value of this franchise."
This shows the feelings of top management to the continued growth of the Boeing business and shareholder return with increases in future cash flow. BA is growing again as it did in 2013 and 2017 with a good economy.
The graphic below shows the 2018 guidance for Boeing from the companies comments in the earnings call.
Source: Boeing earnings call slides
Takeaways
Boeing is a good investment choice for the income investor with its above-average growing dividend and a great choice for the total return investor. Boeing is 13.3% of The Good Business Portfolio and is in trim position. I have been greedy and have let Boeing grow to a large position of the portfolio, and I will trim it a bit within the next month or two. If you want a growing dividend income and great total return BA may be the right investment for you.
Recent Portfolio Changes
- On March 6 reduced position of LB to 3% of the portfolio and will continue to sell off position during the next few months.
- On March 1 increased position in AMT to 0.9% of the portfolio and will continue to add when cash is available.
- On February 21 decreased position in LB to 3.9% of the portfolio and will continue to sell off the position over the next three months and sell covered calls along the way to get a better price.
- Have been moving the LB Feb 16 calls that were in the money, out and up to collect more premiums and to hold the shares. My LB Feb 50 calls expired out of the money, and more calls on LB will be written next week.
- On January 31 trimmed Boeing from 13.1% of the portfolio to 12.8%. I am greedy and am letting BA be much more a part of the portfolio than reasonable money management should allow. The fourth quarter earnings report was fantastic beating estimates by $0.15 at $3.04 (not including tax gain) and with future estimates all showing good growth for 2018. The decrease in deferred costs for the 787 was $581 Million for 36 planes shipped, which was good.
- Wrote some L Brands (LB) May 18, strike 52.5 calls on the part of the holding. If the calls are in the money near exercise time, they will be moved up and out. I intend to sell L Brands sometime this year but am having too much fun selling covered calls.
- On January 18 trimmed Boeing from 12.7% of the portfolio to 12.5%. I am greedy and am letting BA be much more a part of the portfolio than reasonable money management should allow.
- Wrote some L Brands February 16, strike 50.0 calls on the part of the holding. If the calls remain in the money near exercise time, they will be moved up and out.
- Increased the position size of General Electric (GE) to 3.0% from 2.7% of the portfolio. GE has now become a value and income play. GE is a problem child at this point and will be held in the portfolio. You have to let the new CEO have some time to turn around this giant company.
The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The four top companies in The Good Business Portfolio are, Johnson and Johnson (JNJ) is 8.0% of the portfolio, Altria (MO) is 6.9% of the portfolio, Home Depot (HD) is 9.5% of portfolio and Boeing is 13.3% of the portfolio, therefore BA, JNJ, and Home Depot are now in trim position with Altria getting close.
Boeing is going to be pressed to 14% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 Million in the first quarter of 2017, an increase from the fourth quarter. The second quarter saw deferred costs on the 787 go down $530 Million a big jump from the first quarter. The second quarter earnings were fantastic with Boeing beating the estimate by $0.25 at $2.55. The third quarter earnings were $2.72 beating the expected by$0.06 with revenue increasing 1.7% year over year another good report.
JNJ will be pressed to 9% of the portfolio because it's so defensive in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line and Mr. Market did like the growth going forward. JNJ is not a trading stock but a hold forever, it is now a strong buy as the healthcare sector remains under pressure.
For the total Good Business Portfolio, please see my article on The Good Business Portfolio: 2017 4th Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real-time follower, and you will get each quarter's performance after the next earnings season is over.
I have written individual articles on JNJ, EOS, GE, IR, MO, BA, PEP, AMT, PM, LB, Omega Health Investors, Digital Investors Trust (DLR) and Home Depot (HD) that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest, please look for them in my list of previous articles.
Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions on the companies are my own.
