Recent Sale: Boeing

Summary

• I exited my BA position at $229.75, locking in 69.4% profits.
• Prior to my sale, BA shares were up roughly 50% during the last week alone.
• This rally appears to be irrational and being that BA no longer pays a dividend, I was happy to take profits.
• This idea was discussed in more depth with members of my private investing community, The Dividend Kings. Get started today »

After a long, and rather volatile journey, I have completely exited my position in Boeing (NYSE:BA).

In March, I had trimmed my BA stake at $121 and $158 in response to the company's dividend cut. And now, in early June, I sold the rest of my shares at $229.75, locking in profits of nearly 70%, due to the irrational nature of the recent rallies that I've seen in the broad markets and BA stock, specifically.

Boeing has been quite the roller-coaster of late, hitting all-time highs in the $450 area in early 2019. Then, the 737 Max disasters occurred, causing the stock to fall and trade in the $320-380 range throughout much of 2019.

Throughout this period of time, I remained bullish on BA. I thought that the 737 Max issue would play out in a similar fashion to the 787 battery fire issues that we saw back in 2013. My assumption was that a software fix would come relatively quickly, it wouldn't take long for the 737 Max to fly again, and the public would quickly move past the fears associated with the 737 Max brand (as the public is prone to do in today's fast-moving world).

Well, with the benefit of hindsight, I'll be the first to admit that I underestimated the scale and scope of the 737 Max issue for Boeing. Thankfully, during this period of time while I remained bullish, I stayed true to my asset allocation rules and did not add to an already overweight BA position.

Although during 2017 and 2018 BA established itself as the free cash flow king, I knew that at the end of the day, this was a company selling goods with hundred-million-dollar price tags and therefore, it would always have a certain degree of cyclicality attached due to economic sensitivity. This risk profile meant that bullishness aside, I knew I could not get too aggressive with my BA position.

From a stock price perspective, I thought that strong demand for an efficient narrow-bodied aircraft, both in the short term and long term, would trump any negative short-term sentiment surrounding the 737 Max tragedies. Yet, as time moved on, more and more bad news came out, management changed, only to be followed by more mishaps, it became clear that the fix for the Max would not be a relatively quick and easy fix.

Yet, even so, I was content to hold onto my shares due in part to my low cost basis and my belief that eventually, cash flows would return to pre-Max crash levels. BA's strong FCF, growing margins, tremendous bottom-line growth, and ultimately, fast-growing dividend growth announcements made this a very easy stock for me to hold throughout weakness.

However, when COVID-19 struck in early 2020, causing all travel and leisure-related names to fall, things began to get tenuous for BA. With BA's customers fighting for their lives, it became clear that plane orders were not going to rebound in the short term and this cash flow crunch resulted in BA raising debt and cutting its dividend to deal with cash burn.

This, combined with the oil price dropping precipitously, led to a precipitous sell-off. BA hit 52-week lows of $89/share in March.

The new planes that BA is producing are expected to be 25-40% more fuel-efficient than the planes that the company is replacing. However, due to unforeseen low oil prices, demand for these fuel-efficient narrow-bodied planes has dried up.

BA just announced May order & delivery data, which included just 4 plane deliveries during the month, down from six in April. BA received 9 orders for planes (all wide-bodied and no passenger planes). However, cancelations were twice as large, at 18 (including 14,737 Max orders).

In response to these issues, BA has not only cut the dividend, but also laid off thousands of workers, stopped its buyback, and slashed management compensation, but even so, the cash flow outlook is dire in the short term.

During the Q1 conference call when speaking about the impacts of COVID-19 on his business, CEO David Calhoun said:

The latest IATA forecast projects full-year passenger traffic to be down 48% this year compared to 2019, as global economic activity slows down due to the COVID-19 and the governments severely restricting travel to contain the spread of that virus. Here in the U.S., passenger traffic at this moment in time is down 95% compared to a year ago. Airlines are cutting back operations dramatically. As they assess their businesses, they're making difficult decisions that result in grounding fleets, deferring airplane orders, postponing acceptance of completed orders, and slowing down or stopping payments."

What's more, airlines are retiring unused aircraft at a fast rate, which reduces the need for servicing. BA's services business has been a highlight in recent years, leading to increased margins and large cash flows; however, the bullish thesis surrounding this segment has been hurt badly as well. Government contracts have bolstered the services segment in recent quarters, yet management expects growth here to be flat moving forward, which is down significantly from the double-digit growth we've seen in recent years.

I continue to believe that over the very long term, BA will be just fine. Although the company's order backlog is at its smallest size since 2013, we're still talking about more than 4,700 planes. BA still occupies a strong position in the global aerospace market as a part of a duopoly with Airbus (OTCPK:EADSF). Sure, Chinese and Russian manufacturers are attempting to take market share in this space, but ultimately, those upstarts do not appear to be major threats. And most importantly, while the aerospace industry faces headwinds in the short term due to social distancing, I don't think that COVID-19 has changed the trajectory of its long-term secular growth potential.

Long-term growth prospects aside, I decided to begin trimming my position in the aftermath of the dividend cut because the stock no longer met my portfolio's primary goals. Being that fostering reliably increasing income is my #1 priority as a portfolio manager, BA shares without a growing dividend attached no longer seemed quite so attractive.

But being that my cost basis was in the $120 range, I was not interested in selling at the March lows because that would have involved locking in losses (which is something that I try to avoid at all costs). However, once BA shares bounced and I had the opportunity to reduce my stake by locking in profits, I jumped at the opportunity.

I made my first sale on 3/24/2020, reducing my BA exposure by 37.5%, locking in 2.9% gains at $121.71.

And, as BA's stock rose higher and higher, providing me with the opportunity to sell more shares with larger and larger profits attached, I decided to take those opportunities as well.

On 3/25/2020, I sold 40% of my remaining position (25% of my original stake) at $158.17, locking in 27% profits on those shares.

And most recently, on 6/8/2020, I exited the rest of my BA position entirely, selling my remaining shares at $229.75, locking in 69.4% profits.

While I'm certainly happy to lock in strong, double-digit profits on an investment, it's worth noting that these gains are a far cry from the 250%+ gains that I was sitting on prior to BA's recent downfall. Yet, times change and it doesn't make much sense to focus too much on the past and missed opportunities.

In recent articles I've harped upon my concerns regarding a bubble forming in the equity space. Frankly put, I cannot justify the recent "V" shaped rally that the broad markets have experienced and therefore, I've become interested in raising cash.

Raising cash within a dividend growth portfolio is a difficult thing to do, because selling shares typically results in harming one's passive income stream.

The compounding process that I'm relying on to reach financial freedom demands that my actions in the market increase my passive income, not decrease it. However, being that BA no longer pays a dividend, these shares rose to the top of my potential sell list.

BA's management recently highlighted the fact that it could take 3-5 years to restore the dividend due to the costs associated with keeping its supply chain up and running during a period of low sales and the pressure that new debt loads is putting on the balance sheet. Repaying debt appears to be a priority over re-establishing the dividend (which is a prudent decision, in my opinion).

BA roughly doubled its debt load in 2019, going from ~$13.8b at the end of 2018 to ~$27.3b at the end of 2019, to deal with the cash burn that it was experiencing. At the end of Q1, BA carried $38.9b in debt and had $15.5b of cash/marketable securities on hand. And, the day after announcing Q1 results, news broke that BA tapped the bond markets for $25b, adding even more debt to its balance sheet.

In a statement regarding the maneuver, management said that this would give the company the liquidity it needed to keep the business/supply chain up and running for the foreseeable future and therefore, it had no immediate plans to add more debt and/or take government aid.

Because of BA's expanded debt load and diminished cash flows, S&P recently downgraded Boeing's credit rating to BBB-. This still represents an investment grade score, but it is just one notch above junk status.

While I respect the fact that BA has avoided taking government aid, repaying this debt load will be a long road. Management expects to see large negative cash flows in 2020 and while analysts are expecting to see a strong bounce back in 2021 or 2020, when looking at BA's capex requirements and balance sheet, it appears that management's guidance of 3-5 years for a dividend is about right.

I have to admit that I feel a bit naked without exposure to BA in my portfolio.

For so long, I've viewed this company as the best of the best when it comes to American manufacturing. But, being that BA is an incredibly difficult company to evaluate right now (as you can see in the F.A.S.T. Graphs image below, earnings are expected to be negative in 2020 and the recent stock rally appears to be based upon future growth expectations which are expected to play out a couple of years down the road), I was happy to cut ties.

Source: F.A.S.T. Graphs

I have no desire to speculate on a turnaround without being paid as I wait. What's more, BA's recent rally has pushed the stock up to exceedingly high valuations, even using what I believe to be potentially overly bullish analyst expectations looking out to 2021 and 2022.

in the $230/share range, BA was trading for ~23.7x 2022 EPS expectations. BA's long-term average P/E ratio is just 19.7x. During such tumultuous times for the company, this premium valuation simply doesn't make sense to me.

BA shares have rallied roughly 50% during the past week alone. At the beginning of last week, I had no plan to liquidate my BA shares. However, I was happy to take advantage of the opportunity that the market presented.

This move has increased my cash position from roughly 6% of my portfolio to roughly 7%.

I have no plans to put the cash to work in the short term, due to the overbought nature of the broad market. I hope to use the proceeds from this sale to accumulate shares of a high-quality, dividend-growth stock to replace the income that I lost when BA slashed its dividend back in March.

However, I will say that I would also be willing to consider simply buying back the BA shares at a lower price should I be presented with one in the short term. BA shares are down more than 5% from my sale yesterday as I write this and while my plans are not to attempt to time the market and make a short-term trade, I will always be happy to take what the market gives me.

Even though BA's dividend is suspended, I am not opposed to holding a speculative position in BA due to my long-term bullish outlook. But to do so, I would have to believe that I am receiving a wide margin of safety. At $230/share, that was not the case.

This article was previously published for subscribers to The Dividend Kings.

*Since originally publishing this piece, BA shares have tumbled to $170. I have not re-initiated BA exposure yet because I am tracking the negative momentum in the market; however, I may end up doing so in the near future. If I were to buy BA today using the proceeds from my recent sale, I would be able to increase my share count by roughly 33%. Sometimes, in situations like these, I simply chuckle at luck and take what the market gives me. If I buy BA soon, I will keep everyone informed with an updated article.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BA over the next 72 hours. 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.

Comments

[bobmags]

Probably a better entry point but I wouldn’t trade this stock
Huge barriers to entry
No meaningful competition
And US government will backstop
It regardless of which party wins.
If virus is defeated BA wins.
One major order and the stock rockets.

[rockjcp]

Focus on certification flight. Coming shortly.

[USER48581927]

nothing can go wrong... go wrong... go wrong...

[User 47294666]

It's to bad that the poor managem can't be fired. They do it to staff. Boeing needs a reboot

[Nicholas Ward]

Well, the CEO was let go. I agree they need an overhaul - I was disappointed to see them hire from within with regards to the new CEO.

[GameBuzz]

@Nicholas Ward “Meet the new boss. Same as the old boss.”
—The Who, “Won’t Get Fooled Again” 😁

[Good1]

I sold off about half of my BA shares @ 320. 300% gain or something like that. There was just too much drama. I don't like drama stocks. Remaining shares have 87% unrealized cap gain. Not sure.. on what to do. Tempted to sell.

For me a bigger question is AMZN. 6 shares in at 32.00 = 7,754.03% unrealized cap gain. It seems to be in clover now - but maybe that's the time to sell. Never really liked the stock but it's been a growth monster.

Sort of wonder if AMZN is a big ponzi scheme.

[Good1]

Acquired 09/26/2006 (AMZN) - when it was a book store

[Nicholas Ward]

Congrats on those AMZN profits! That's amazing. I am content to hold AMZN for the long-term, personally. I think they have a long growth runway.

[hopeinsf]

I would hold onto AMZN as well, and sell BA on the news, as the recent volatility shows, it can move quickly

[Allen Greathouse]

nice job nick, that company is a black hole. impossible to predict going forward. happy you locked in a profit.

[Nicholas Ward]

Yeah - the fact that forward earnings are negative and continue to be volatile makes this company very hard to evaluate, IMO. With that in mind, plus the lack of a dividend, meant that taking profits was fairly easy to do after the recent run-up.

[Buyandhold 2012]

But, Nicholas, Boeing up by 11.52% so far today.

[Nicholas Ward]

It's still down significantly from where I sold. I'm still in the process of deciding if/when I want to buy it back lower.

[Kingstocktrader224]

2/3 sells were below where it trades now...

[hopeinsf]

also, sold almost all the shares above 210, after buying as low as 114, had a position before the crash too

[sts66]

" it's worth noting that these gains are a far cry from the 250%+ gains that I was sitting on prior to BA's recent downfall"

That's why I always take at least my cost basis out when I hit 200%+ profits, sometimes do it at 100% gains depending on what the investment is, meaning a stock vs. a CEF.

[Nicholas Ward]

I love the idea of playing with the houses money; however, from a dividend growth perspective, I'm usually happy to simply buy and hold so long as the dividends continue to meet growth expectations. The downside to that situation is one like BA where the dividend is cut and the stock craters...but these situations are exceedingly rare. In 8 years of portfolio management, having owned 100 or so names, I've only ever experienced 4 dividend cuts (3 of which came during the COVID crisis).

[Vandooman]

Not a bad strategy but I often let great companies ride. As Peter Lynch once said, I don't understand why people cut the flowers and feed the weeds. I did sell half of Snap On recently due to a very large exposure, some tax loss carry forwards to eliminate tax on gains, and a bit of head scratching as to whether it was still a great company. Tax is a consideration in a taxable account. You only have the net proceeds to invest.

[Kingstocktrader224]

Because great companies can lose a ton of their gains...See XOM, GE, IBM, T, M...All were great and lost the majority of their gains

[bengalesq]

I agree. Bought at $95 and sold at $160 five days later. It's tough on a pop like that not to get too enamored with your pick - it becomes more precious than it had been when the world validates it so quickly. Took a few for me to come around on the notion that, when I bought it, if you had told me it would go up 60% on three years I would have been thrilled. 60% later in five days with no notable changes in the thesis means I have to sell. That valuation is no longer there given the uncertainty. You have to think this will come back down with the broader market. I will buy a small position again at around $100.

[Nicholas Ward]

In situations like that, I see nothing wrong with simply taking what the market gave you - great trade!

[GameBuzz]

I applaud your discipline. I have BA in my Roth so I have a 10-year time horizon but I still bought some more at 121 and sold that at 205, missing the top (tho still better than adding at 160 and selling at 150 like I did in March).
As crappy as the co. and mgt. have become, I just can’t see this administration (or the next, whoever and whenever that will be) allowing them to go belly up and switching the defense contracts to Airbus.
But I will sell some more when it gets back toward the 200dma. Good job!

[Nicholas Ward]

Thanks. Yeah, I don't see BA going belly up either - they're too important to the global aerospace industry.

[hopeinsf]

I have also exited most of BA, leaving a small portion for the 737 max certification news

[Nicholas Ward]

That was basically my plan as well, prior to the recent sale. However, the run-up to $230 inspired me to exit the position because I couldn't justify the premium.

[CHORFa]

The article is a good analysis. The whole industry is watching the real final outcome of Covid-19 . May fast take-off , may crash too .

[Nicholas Ward]

Yeah - this has become a very sensitive industry for sure - being that I think the entire rally off of the COVID-19 lows in March has been pretty irrational, I was pleased to take profits and bolster my cash a bit here.

[A_Fava]

Good work buying low and selling high. Based on my cost position, I had to sell for a loss and reinvested it in tech which has done well for me. You did the right thing. BA is still in trouble and that isn't changing regardless of irrational exhuberance.

[Nicholas Ward]

Thanks! It's always hard selling at a loss - I struggle with sometimes holding onto losers for too long because I'm usually stubbornly unwilling to do so. Your rotation into tech seems like a great idea - congrats!

[JEDA81]

Nicholas. I read with pleasure your analysis. Thanks for sharing it.

[Nicholas Ward]

Thanks for the comment - glad you enjoy my work!

[SteamAlpha]

Good morning, This is one of the best pieces you have ever written. Has nothing to do with BA, but you in the clearest detail explain buying low, selling off in pieces - not all at once, and then saying you might buy back in if prices continue to drop. This article could be a chapter of a book about stock ownership & management. And to think this was supposed to be dividend income, but it turned into banking stock price appreciation. "Taking what the market gives you", what a wonderful phrase. Nicely done and thank you.

[Nicholas Ward]

Such high praise - thanks so much! Yeah, at first, BA was all about dividend growth, but when things change in the markets, an investor has to change along with them. I wasn't pleased about the dividend cut, but I have been pleased with the profits that I've been able to lock in here with BA shares.

[RoseNose]

Thanks for sharing @Nicholas Ward your final decision to exit BA. I did so @ ~$300 and was upset with myself for waiting that long. I think many have made out nicely buying near $100 and dumping at $200. It could happen again. BA is one hugely troubled and poorly managed company, very sad to see it, as it has some really excellent products that deserve better.
I hope they can get it going / soaring again. Best always and TGIF! Rose :))

[Nicholas Ward]

Congrats Rose! With the benefit of hindsight, I certainly wish I would have sold out much closer to the recent highs. I was holding out hope that the 737 Max issues would be resolved and the dividend would be safe, but then COVID-19 came around and proved to be too much for this company (and just about every company in the aerospace industry).

[rockjcp]

I agree @228 BA has much to prove. but @170 very little. Defense on fire and finally news is MAX is moving forward to a certification flight . FAA Chief before Senate next week. Short of a virus shut down better days may now be ahead. BA can justify 200.

[brainhub]

... and with vaccine: $300+

[Nicholas Ward]

I considered buying it all back yesterday in the $170 area - however I want to see where this negative momentum goes. We're up today obviously, but I think the overall market is still overvalued and due for a double digit drop. In this happens, BA will fall too.

[Gary Kime]

Nick,

Like I said before I love your portfolio and your style, but I think you pull the sell trigger too quickly in general?

[Nicholas Ward]

Possibly - but when a dividend cut happens, I have very little reason to hold a stock any longer being that it no longer contributes to my primary goal. If BA was still paying a dividend, there is no doubt that I would still own shares.

[YaMutha]

Awesome bud, you locked in a short term cap gains tax too,. 70% profit.. more like 44% after you Pay all those taxes. Just stay long, this stuff will all be up significantly next year, do yourself a favor and hold then sell with a long term gain instead. This is not a look at me contest. We’re all up right now, locking In the quick profit at first sign of fear is easy, the real stones are on those who can stomach the volatility and hold on for higher less taxable gains.

[Nicholas Ward]

I've owned BA for years, so the gain is long-term. As I said in the piece, BA's dividend cut was the inspiration for the sale - I held onto my entire large position throughout the drop prior to the cut news because of my long-term bullish stance. However, when a dividend is cut, a stock no longer meets my portfolio's goals and therefore, it usually has to go.

[as10675]

"...dividend cut was the inspiration for the sale - I held onto my entire large position throughout the drop prior to the cut news..."

The dividend makes many people wait and then finally sell at a low point.

Better I think to harvest some profits when stock is moving up, especially moving up fast.

Lighten up as stock starts down.

Don't buy back until stock is moving back up.

I own all kinds of stocks. From what I have been reading for 11 years here on SA is that many income only investors put far too much faith in the dividend and often in puny dividend growth. Waiting for a dividend cut to sell was a wait-too-long.

[Kingstocktrader224]

Sell deep ITM calls and you could have avoided short term capital gains well protecting a lot of downside and adding a little more profit

[The Sublime Porte]

LOL hilarious to see a Boeing permabull finally capitulate. This company has been a disaster for years and the only reason BA shares and your investment didn't go to zero is thanks to Jerome Powell. You should send him a thank you letter.

I made over $350,000 on a $5000 investment in Boeing puts in March. Now I'm playing both calls and puts (long term puts, short term calls). I think there is a good possibility this company goes under in the next year or two but it will be a struggle because politicians love Boeing.

[Gary Kime]

You seem to have all the answers? I’ll take your bet on whether BA goes under or not in the next year or two. That statement told me everything I need to know about your business IQ.

[T'pee]

I doubt it, despite all the mismanagement and double whammy bad luck Airbus and Boeing's customers are trapped, barriers to entry to this sector are massive, today perhaps even more so. No, Boeing is one of those companies that will continue to do ok over the long run, despite the unbelievable incompetence of its leadership team, something I suspect has now been corrected - the blunders that lead to the 737Max debacle will likely reverberate in company procedures for a long time, in a good way. No position but willing to consider at much lower prices. Good job for locking in solid profits @Nicholas Ward

[Nicholas Ward]

Yeah, I see no way that BA goes under - we're talking about an unprecedented economic environment here...no one could have foreseen a virus essentially shutting down the economy/air lines. The barriers to entry to this space are still extremely high and I suspect BA will be around for a very, very long time. Once the stock starts paying a dividend again, I'll be extremely happy to own it. And, as I said at the end of the piece, I may end up just buying the shares back in the short-term, dividend or not, due to the discount that the market has provided relative to my recent sale price.

[Craig Dupler]

A company that makes its money on products or services that are dependent on technologies that it develops itself, needs to spend a minimum of 25% of free cash flow on R&D. Something closer to 50% is more prudent if core technologies are significantly changing. When the required R&D investing for a company is not done over a period of two decades, all of its future potential will have been consumed.

Further, there are two very different classes of R&D investment. One is in the incremental improvement of existing products, and the other is in the development of more advanced products that provide better value for their customers. It's a combination of continuous improvement and leapfrogging its own products.

As we walk through Boeing's entire commercial and defense product lines, what do we see in terms of product ages, how much money has been spent on R&D, and what percentage of that spend has been on all new products? Further, if we look at what it is now selling and compare them to competitive offerings from other companies, what do we see? And, if we look at the length of the list of exciting new breakthrough products Boeing has that are well along in their development cycle, how many fingers do we need to count them? Is there even one?

The street may be able to bleed this once great company a little more. But now, it's more about wild swings in the stock price as the waves of the greater fool school of investing alternate between chasing the stock and running from it.

[USER48581927]

CD - not sure of your definitions, but how many of BA's dependent technologies do you think the OEM developed and sponsored itself, as opposed to adopting the fruit of R&D performed elsewhere, often at government (ie general public) expense? Or does your finger count provide the answer?