For a very long time, I’ve said that energy stocks are absolute must-haves in any long-term diversified portfolio. However, as I’ve been compiling potential candidates for my stock advisory newsletter, The Liberty Portfolio, it is impossible to ignore the necessity of having defense and aerospace as a central component as well.
While I haven’t settled on exactly what to purchase for The Liberty Portfolio, average investors may want to consider Boeing Co (NYSE:BA) for their own long-term portfolio.
As it is, defense and aerospace are an essential part of America. National security, even during dovish administrations, remains a necessity. In fact, since the beginning of the Obama years, the sector ETF for defense — iShares US Aerospace and Defense (NYSEARCA:ITA) — has returned almost 300%.
I consider sectors and stocks that are “intrinsically wrapped into human DNA” as must-haves in a diversified long-term portfolio. Yet until recently, I considered those candidates to be things that Americans directly touched with their consumer dollars. Aerospace and defense isn’t exactly a fit for that criterion, yet the sector is part of our DNA. Our country can’t live without this sector.
Boeing Has a Few Perks
Boeing has led the way in this sector, along with other select names, for a long time.
There’s plenty of business to go around in the arenas that BA specializes in. There simply aren’t very many companies in the entire world that manufacture commercial aircraft. That includes all the aviation services support, spare parts, training, maintenance documents and technical advice that go along with those planes.
The same goes for military aircraft. The field is a bit larger in network and space systems, but not by much. Naturally, Boeing and its Global Services & Support segment offers all the integrated logistics services for its products that no other company can really offer.
It’s a bit like buying an Apple Inc. (NASDAQ:AAPL) iPhone and being required to purchase Apple accessories, because no third-party provider can make the accessories that Apple designers have built into their designs.
So in many ways, BA is effectively part of an oligarchy, and investors like oligarchies. Of course, when you think about a company’s products having a wide moat, you quickly realize that it isn’t just anyone who can get up and launch an airplane company that includes all the logistics and technology that is required.
Bottom Line on BA Stock
BA stock has a solid balance sheet. The company has $9.2 billion in cash and short-term investments, and $4.85 billion in long-term investments.
This offsets the $10.4 billion in debt Boeing stock carries, which only costs about 3.2% annually to service. So interest only accounts for less than 1% of revenues.
BA stock has plenty of backlog, with $49.4 billion in accounts payable. It’s nice to know that a company has more than 50% of its annual revenues already accounted for, knowing customers are extremely likely to pay.
Cash flow has always been consistent at Boeing, and it’s one of the reasons it has a very reliable dividend. Operating cash flow was $8.86 billion in FY14, $9.36 billion in FY15 and $10.5 billion in FY16. Capex increased modestly each year, bringing free cash flow to $6.6 billion in FY14, $6.95 billion in FY15 and $7.9 billion in FY16.
As a result, the Boeing stock dividend payout increased year-after-year. FY16’s dividend payments of $2.6 billion thus represent a payout ratio of about 32%.
Although Boeing’s earnings growth can be difficult to track, as revenue and R&D budgets oscillate from year-to-year, the 5-year annualized growth rate, according to analysts, is 18%. On a pure earnings-per-share model, with BA due to earn $10.24 per share in FY18, the stock trades at 17x earnings.
That’s a very reasonable price for BA stock.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he had no positions in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
