Boeing: What Will The Dividend Increase Be Next Week?

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About: The Boeing Company (BA), Includes: ABC, AMT, DLR, EOS, HD, JNJ, OHI, SLP, V
by: William Stamm
Summary

Boeing's total return outperformed the Dow average for my 59.0 month test period by 115.98%, which is fantastic.

Boeing has increased its dividend for nine of the past 10 years and presently has a yield of 2.1%, which is a bit above average.

Boeing three-year forward CAGR of 14% is great and will give you good growth with the increasing need for aircraft that have better fuel efficiency and fits the point to.

This article is about Boeing (BA) and why it's a buy for the dividend growth investor and total return investor. Boeing is the largest manufacturer of commercial aircraft in the world.

Boeing is 13.1% of The Good Business Portfolio. BA has had good times recently and has been slow the previous three years. The growth 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 in a short time the KC-46A program will start bringing in cash as they passed the second phase refueling tests. With this present downdraft in the market, BA is a buy.

If you want details on individual 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 for the last two years. It hit a three year period of flat prices from 2014-2016 while the 787 problems worked out. This year has seen the price going up and down building a base to start the take off again.

Chart 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 considering for the portfolio. For a complete set of the guidelines, please see my article " The Good Business Portfolio: Update to Guidelines, August 2018". 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.

  1. 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 nine years of increasing dividends and a 2.1% yield. Boeing is, therefore, a good choice for the dividend income investor with more to come from the increasing cash flow. The recent payout ratio is moderate at 44%. 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.
  2. I have a capitalization guideline where the capitalization must be greater than $8 Billion. BA easily passes this guideline. BA is a large-cap company with a capitalization of $195 Billion a bit down from my last report. Boeing 2018 projected cash flow at $16 Billion is great allowing the company to have the means for company growth and increased dividends next week.
  3. I also require the CAGR going forward to be able to cover my yearly expenses and my RMD with a CAGR of 8%. My dividends provide 3.3% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.2%. The three-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.
  4. 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 171.33%, more than the Dow's total return of 55.35%. Looking back five years, $10,000 invested five years ago would now be worth over $26,100 today. The total return in the good year of 2013 was 79.56% compared to the DOW gain of 27%, a big beat. 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.
  5. 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 an increased target price to $450, passing the guideline. BA's price is presently 37% below the target. BA is under the target price at present and has a moderate PE of 20, making BA a good buy at this entry point if you are an investor that wants great future total return growth and an above average increasing the dividend.
  6. One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is strong, and an above average yield 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 economy grows and you have income 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 59-month test compared to the Dow average. I chose the 59 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 171.33% 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 nine of the past ten years making BA also a good choice for the dividend income investor. The Dividend is estimated to be increased next week December 2018 to $2.10/Qtr. from $1.71 or a 23% increase.

DOW's 59.0 month total return baseline is 55.35%

Company Name

59.0 Month total return

The difference from DOW baseline

Yearly Dividend percentage

Boeing

+171.33%

+115.98%

2.1%

Click to enlarge

Last Quarter's Earnings

For the last quarter on October 24, 2018, Boeing reported earnings that beat expected by $0.55 at $4.07 and compared to last year at $2.72. Total revenue was higher at $25.1 Billion more than a year ago by 3.8% year over year and beat expected revenue by $1.26 Billion. 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 January 2018 and is expected to be $4.45 compared to last year at $5.18.

The graphic below shows the comparison to last year's third quarter earnings and revenues.

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 excerpts

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."

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 great 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 for the first three quarters of the year with yearly cash flow in the range of $16 -16.5 Billion.

Source: Boeing earnings call slides

The FED has kept interest rates low for some years, and on September 26 they raised the base rate 0.25%, which was expected. I believe that they will not raise the rates anymore this year, but will go slow the rest of 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 October/November downdraft in the market may slow down the FED as they see the reaction to what they have done.

From October 24, 2018, earnings call Dennis A. Muilenburg (Chief Executive Officer, Chairman, and President) said

Thanks to the dedicated efforts of our teams across the company, Boeing delivered third quarter 2018 financial results that include higher revenue, earnings per share and operating cash flow, driven by solid execution across the company.

During the quarter we generated $4.6 billion of operating cash and repurchased $2.5 billion of Boeing stock. We also paid $1 billion in dividends, reflecting a 20% increase in dividends per share from last year. We continued to deliver on our commitment to returning cash to shareholders while investing in our people, innovation, and future growth.

Revenue in the third quarter was $25.1 billion, reflecting higher services and defense contract volume. Core earnings per share of $3.58 were driven by strong Commercial Airplane performance and a lower tax rate, primarily related to federal income tax audit settlements, partially offset by charges related to planned investments in the newly-awarded T-X Trainer and MQ-25 unmanned aircraft and cost growth on the KC-46 Tanker.

For the full year, we are raising guidance for revenue and earnings per share and reaffirming operating cash flow. We're also raising BCA segment operating margin while reducing BDS margin guidance.

Let's take a look at Commercial Airplanes. For the quarter, Commercial Airplanes generated revenue of $15.3 billion, reflecting 190 deliveries, with operating margins of 13.2%. Continued healthy sales activities contributed to 171 net new airplane orders worth $13 billion during the quarter, adding to our robust backlog that stands at more than 5,800 airplanes and is worth $413 billion."

This shows the feelings of top management to the continued growth of the Boeing business and shareholder return with an increase in future cash flow growth. BA is growing again as it did in 2013 and 2017 with a good economy.

The graphic below shows managements increased guidance for the year.

Source: Boeing earnings call slides

Takeaways

Boeing is a good investment choice for the income investor with its above-average yield and growth and a great choice for the total return investor. Boeing is 13.1% 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 when BA hits 14% of the portfolio. If you want growing dividend income and great total return BA may be the right investment for you.

Recent Portfolio Changes

I intend to watch the earnings reports for the companies in the portfolio and may finally decide to trim my high flyers that are over 8% of the portfolio so I can invest in good companies on my buy list.

  • On November 19 trimmed 3M from 1.4% of the portfolio to 0.92%. The last earnings report was not good and the next year does not show the growth that is wanted. The portfolio will most likely sell off this position in the New Year.
  • On October 10 trimmed Home Depot (HD) from 10.1% of the portfolio to 9.6%. I love HD but don’t want it to get above 10% of the portfolio.
  • On October 10 added starter position of VISA (V) at 0.4% of the portfolio.
  • On August 22 increased the percentage of DLR to 3.3% of the portfolio, I want to get this REIT to a full position of 4%.
  • On August 15 sold all remaining Amerisource Bergen(ABC) in the portfolio.
  • On August 9 reduced Amerisource Bergen (ABC) to 0.4% of the portfolio. I will most likely sell the remainder of ABC next week. The company margin is very thin, and I don't like the present pressure of the opioid crisis. The risk has gotten too high versus the reward.
  • On July 12th bought a small starter position (0.1% of the portfolio) in Simulation Plus (SLP) a small software company that helps test/simulate new drugs before they are released. SLP is a very speculative investment and should be watched carefully.
  • On June 20th closed out covered calls and sold KHC position, I needed some cash. I got a better price using the calls but missed some of the recent gains.
  • On June 8th sold KHC July 57.5 calls against the position and will make 4% if the KHC price remains the same. The calls are now in the money, and I may move them up and out when the time value is small.
  • On May 14th, I trimmed the position of Eaton Vance Enhanced Equity Income Fund II (EOS) from 9.2% of the portfolio to 8.9%. I still like EOS and don't want to overweight this fund which is high in technology companies.
  • On March 29 increased position of American Tower (AMT) to 0.8% of the portfolio, I will continue adding to this position as cash is available.

The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The four top companies in the portfolio are, Johnson & Johnson (JNJ) is 8.8% of the portfolio, Omega Health Investors (OHI) is 8.6% of the portfolio, Home Depot (HD) is 8.9% of the portfolio and Boeing is 13.1% of the portfolio. Therefore BA, OHI, JNJ, and Home Depot are now in trim position, but I am letting them run a bit since they are great companies.

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 of 2017 earnings was fantastic with Boeing beating the estimate by $0.25 at $2.55. The third quarter of 2017 earnings were $2.72 beating the expected by$0.06 with revenue increasing 1.7% over last year, another good report. The first quarter earnings for 2018 were unbelievable at $3.64 compared too expected at $2.64. Farnborough Air Show sales in dollar value just beat out Air-Bus by about $6 Billion, and both companies had a great number of orders. The second quarter earnings beat expectations by $0.06 at $3.33, but a good report was hurt by a write off expense on the KC-46 which should start delivery in December of 2018. Boeing recently got an order for 18 more KC-46A planes. As a result of the good third-quarter earnings, S&P CFRA raised the one-year price target to $ 450 for a possible 37% upside potential.

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 it. JNJ has announced a dividend increase to $0.90/Qtr which is 56 years in a row of increases. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure.

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.

Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, LB, MMM, SLP, EOS, V

Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, LB, MMM, SLP, EOS, V. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.