By Bob Ciura on August 13th, 2016
Boeing (BA)dominates the aerospace industry. Its core business, commercial aircraft, is essentially a duopoly.
The stock took a nosedive in February, to $108, after news surfaced of an SEC investigation into Boeing’s accounting practices regarding its flagship 747 and Dreamliner planes.
Fortunately, the investigation has not resulted in any meaningful impact on Boeing, and its stock has recovered some altitude. It now trades at $135, and even stronger gains could be in store going forward.
The reason why investors should be bullish on Boeing is that the company is highly profitable, is benefiting from the steady growth of the global economy, and has a compelling future growth catalyst in the form of its recent Iran deal.
Dividend investors should view Boeing in high regard, because not only does the stock offer a hefty 3.3% dividend yield, but it also has a long history of success.
Boeing has paid steady or increasing dividends for well over 30 years. It is also one of only 32 S&P 500 blue chip stocks with a dividend yield over 3% and 100+ years of operating history.
New Strategy Takes Off
Over the past several years, Boeing has repositioned its business model. Instead of focusing on defense contracts as many of its peers in the aerospace industry have done, Boeing has focused itself on commercial aircraft. This strategy has worked well, as the constant threat of budget cuts keeps a lid on defense spending in the U.S.
As a result, Boeing has taken an iron clad grip on commercial aircraft. More than two-thirds of Boeing’s $96.1 billion of 2015 revenue was generated by the commercial aircraft division. Boeing’s commercial aircraft unit posted 10% growth last year, far ahead of its military business, which saw revenue decline for the year.
Overall, Boeing grew revenue and free cash flow last year by 4% and 6%, respectively, which is a very respectable result in a slow-growth economy.
Also, keep in mind that unfavorable currency fluctuations resulting from the strong U.S. dollar held back Boeing’s growth last year.
It has performed well to start 2016 as well. Through the first half of the year, Boeing’s revenue and cash flow increased 1% and 32%, respectively, versus the same period last year. Last quarter, Boeing notched another quarter of growth in revenue, deliveries, and bookings.
Source: Boeing 2nd Quarter 2016 Presentation, slide 5
This success should continue well into the future, as demand for commercial aircraft continues to rise. Its commercial aircraft deliveries set a company record last year. Going forward, global economic growth provides a tailwind for Boeing’s future deliveries. Boeing’s order backlog stands at nearly $500 billion.
For the full year, the company expects another 6% growth in cash flow, and over the long-term, growth could soar even higher thanks to Boeing’s exciting deal with Iran.
Future Growth Catalyst
Boeing should have clear skies ahead, thanks to its unique growth catalysts. Primarily, Boeing’s future will be aircraft deliveries to new markets. For example, earlier this year the company notched a landmark agreement with Iran.
Iran badly needs to update its fleet of aircraft. For many years, Iran’s insistence on keeping its nuclear program resulted in significant economic sanctions by the rest of the world. This includes commercial aircraft, and as a result, Iran is left with one of the world’s oldest aircraft fleets. Because of this, it is estimated Iran could be need as many as 400 aircraft.
While the exact terms of the deal have not been disclosed, various media outlets including The Wall Street Journal are reporting that the agreement could be worth as much as $25 billion. It goes without saying that this would be a huge opportunity for Boeing. A $25 billion increase would add approximately 26% revenue growth to the company.
Balance Sheet & Valuation
The other operating advantage for Boeing is that it maintains a healthy balance sheet. It ended last quarter with $10 billion in combined cash and marketable securities, up from $8.9 billion at the same point last year.
It also has a manageable level of debt on the balance sheet, with $11 billion in combined debt from the core business and the financing arm. This provides Boeing with strong credit metrics. It receives an ‘A’ credit rating from Standard & Poor’s.
Source: Boeing Investor Relations
Based on Boeing’s strong balance sheet and earnings, the stock could be considered undervalued. Although shares have recovered significantly off the February low, they are still well below the 52-week high of $150. As it stands currently, Boeing stock trades for a forward price-to-earnings ratio of 13.
That is below the forward price-to-earnings ratio of the S&P 500 Index, which is around 18. Considering Boeing is a blue chip industry leader with an above-average growth rate, it stands to reason the stock should be awarded with an above-average valuation as well. This could lead to further share price gains going forward.
Boeing has made great progress growing its business over the past five years. From 2010-2015, Boeing’s commercial deliveries rose 65%. And, it has returned $32 billion to investors in that time, consisting of $21 billion of share repurchases and $11 billion of dividends. Boeing generates a lot of cash, and returns a great deal of cash to shareholders. Last December, it raised its dividend by 20% and also approved a massive $14 billion share repurchase.
Over the past five years, Boeing has raised its dividend by 21% compounded annually. That is a very high level of dividend growth which has resulted in an above-average dividend yield. Boeing’s 3.3% dividend yield is very favorable compared with the broader market. The S&P 500 Index has an average dividend yield hovering around 2% right now.
The company has plenty of gas left in the tank to continue rewarding shareholders. The stock price dip earlier this year gave investors a tremendous buying opportunity, but the stock could still be considered undervalued. Investors can reasonably expect Boeing to grow earnings in the mid-single digits on an annualized basis moving forward. Combined with the dividend, it is not unreasonable to expect 10% total returns each year.
Boeing’s combination of stability, growth potential, above-average dividends, and reasonable valuation make it a top 20 stock using The 8 Rules of Dividend Investing.
Boeing’s future catalysts should provide enough growth to continue raising its profits and dividends for many years to come.