Boeing Co (BA) is shoveling a lot more cash back into shareholders’ pockets, which adds some financial engineering to the already strong bull case for Boeing stock.
As the most recent quarter showed, Boeing stock should have more upside ahead based on fundamentals alone.
But lavishing cash on investors never hurts.
Besides, BA stock hasn’t really gone anywhere in two years; at 9% gains since this point in 2013, Boeing is trailing the broader market by a few percentage points. So when the board of directors says shares are undervalued, they can make a good case.
The news: The aircraft giant hiked its quarterly dividend by 20% to $1.09 a share. At current prices, that would lift the yield on BA to 3.1% — a far more attractive level than the 2.5% Boeing stock yields now.
Based on today’s share price, the hike has BA stock tied with Lockheed Martin (LMT) as the top-paying dividend stock in the aerospace and defense sector, and solidifies its attractiveness as an equity income holding.
But … if that’s not enough to make investors happy, Boeing also raised its share repurchase program by $2 billion, or more than 2% of its market capitalization. BA is now on track to buy back $14 billion of its own shares, up from a prior authorization of $12 billion.
BA spent $6.75 billion on buybacks in 2015 alone, and better yet, it has more than ample cash generation to lift the authorization — and hike the dividend again — when the board chooses to do so.
Boeing Stock Is Flying High on a Supercycle
The key to Boeing’s cash is the 787 Dreamliner — which is delivering narrower losses and is expected to be cash-flow positive in the current quarter — but the entire segment is in an upturn.
The industry is entering what analysts expect to become a supercycle, as the world’s air carriers retire older aircraft in favor of more fuel-efficient planes like the 787. Helpfully for Boeing and others, the precipitous fall in energy prices hasn’t had any effect on those plans.
If we are about to jump into a supercycle, Boeing is off to a good start. In the most recent quarter, BA delivered 199 planes worth nearly $17.7 billion. In last year’s quarter, deliveries of commercial aircraft were 186 worth $16.1 billion.
Just as critical, the pipeline remains full. Boeing received 166 net orders in the third quarter, bringing the total backlog to 5,700 planes.
Free cash flow in the beat-and-raise quarter surged to $2.3 billion, up from $317 million last year. The surge in commercial aircraft orders should generate even greater cash flow going forward.
As much as the market likes a little financial engineering, it pales in comparison to fundamentals, which are forecast to remain healthy. Indeed, Wall Street expects earnings per share to increase 14% in 2016. Meanwhile, Boeing stock changes hands at just 15 times forward earnings.
Boeing shares are up more than 10% for the year-to-date, which would please just about any investors staring at red ink in the S&P 500. And BA’s cash, earnings and valuation ensure that the stock will clobber the broader market next year as well.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
