Is Boeing Stock An Ideal Dividend Play In 2016 And Beyond?

  • Boeing has just hiked its dividend by 20% to $1.09. The Boeing stock now yields 3.05%.
  • The company has also announced an increase to its share buyback program.
  • what are the chances that Boeing's dividend will keep growing in 2016 and beyond?

Boeing (NYSE:BA) stockholders are celebrating another dividend windfall after the company announced that it has hiked its dividend 19.8% from $0.91 to $1.09. Boeing stock now sport a forward dividend yield of a healthy 3.05%.

Meanwhile, Boeing continued with its bountiful stock buyback program by announcing it had raised its stock repurchase program to $14 billion from $12 billion previously that was approved last December. Of the old authorization, Boeing had repurchased shares worth $6.75 billion with $5.75 billion remaining. This in effect means that Boeing might repurchase stock worth as much as $7.75 billion in the coming fiscal year.

The effect of share buybacks can be muted if a company pays out high levels of executive stock- based compensation since this effectively dilutes the stock. Luckily for Boeing investors, the company typically pays out very modest levels of executive stock-based compensation. During the first three quarters of the year, the company spent $141 million on stock-based compensation, a decrease of 7% compared to the previous year. That translates to ~$188 million for the full year.

Assuming this line item remains unchanged in FY 16, Boeing’s stock repurchase will be enough to reduce its outstanding share count by a massive 8% in just one year. A reduction in outstanding share count by just 5% is usually considered enough to induce a positive buyback effect in the form of artificially growing earnings and propping the stock price.

Earnings and free cash flow growth

The consensus is for Boeing to report EPS of $8.25 in the coming fiscal year, down 4% from this year’s EPS of $8.60. But after factoring in the huge share buyback program, Boeing’s earnings might remain unchanged in the coming year or even increase slightly. Some astute investors might point out that maybe Boeing is following in IBM (NYSE:IBM) footsteps. IBM was famously able to artificially grow its earnings by a substantial amount over a period of five years by using massive share buybacks that almost reduced its outstanding share count by 50% over a 7-year period.

Share buybacks are good when a company is confident that its stock price will keep growing. Boeing stock has returned 12.7% YTD. Assuming the stock continues on this trend in the coming year, Boeing’s total shareholder yield (share price growth + dividends+ buybacks) could hit well over 20%.

And now the million dollar question: what are the chances that Boeing will keep growing its dividend in 2016 and beyond? As we have already seen, Boeing’s earnings might not increase by much in 2016. But the good thing is that Boeing’s earnings payout ratio sits around 50%, which still leaves some room for an increase even assuming earnings stay constant or even fall a little.

But perhaps the most encouraging indication that Boeing can continue growing its dividends in the short-term is the company’s vastly improved free cash flow position. Companies typically pay out dividends from their free cash flow, so an improving free cash flow position often means that chances of dividend growth improve.

Boeing's operating cash flow improved 62% to $6.24 billion during through the first three quarters of the year while the company’s free cash flow increased a massive 93% to $4.4 billion. Many analysts pinned the improvements on lower losses from Boeing’s 787 Dreamliner program as well as lower capex.

Boeing has been losing a lot of money on Dreamliner capex and sales--estimates of about $80 million per plane are often mentioned. But those losses have been coming down. During the last quarter, it’s estimated that Boeing lost ‘‘just’’ $25 million on every Dreamliner sold. Boeing said that it was on course to finally achieve profitability on 787 by the end of the year, which means the company’s free cash flow might see another huge boost in 2016.

Over the medium and long-term, Boeing does not seem to be in any danger of running out of growth runways. Raw airline growth is expected to remain healthy over the coming years. Boeing’s order backlog at the end of the third quarter clocked in at $485 billion, good to take the company for another seven years at current production rates.

Takeaway

Boeing seems to be firing on all cylinders, and investors can expect the company to continue with its healthy dividend increases both in the near-term and medium-term. The biggest risk right now is that the company’s Dreamliner program might not become as profitable as hoped for. But even that does not appear to be a big enough risk considering that Boeing’s vastly improved free cash flow seem to indicate that its 787 losses could be coming down.

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  • I do not have any business relationship with the companies mentioned in this post.
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