Buy Boeing Co (BA) Stock, But Do It for the Dividend

For aerospace giant Boeing Co (NYSE:BA), last year’s sonic boom has continued throughout 2017. Shares of BA stock more than doubled the S&P 500 last year, and they’ve surged 16% to do it again for the year-to-date.

Buy Boeing Co (BA) Stock for the Dividend

Much of that has been driven by the belief that President Donald Trump will continue to pump significant dollars into military spending, though Boeing is getting a different Trump bump today amid his visit to Saudi Arabia, which has just inked some new contracts with the defense and aerospace giant, along with Lockheed Martin Corporation (NYSE:LMT).

Despite Trump’s tweets about the cost of Air Force one, his pro-military budget has already made plans to increase America’s defense forces budget by a substantial sum. Boeing will get a decent slice of that pie.

So it’s no wonder why investors have bid up shares of BA stock — along with rivals like LMT and Raytheon Company (NYSE:RTN) — by substantial sums.

The question is how much of those gains can keep coming, and how can Boeing stock stay aloft if that particular narrative peters out?

Boeing: Too Far, Too Fast?

With Boeing shares up such a staggering amount in such a small time, investors have to wonder how much more growth is in the tank to back up the action. The short answer might be “no,” but that would come with a big asterisk.

It’s not that BA is a bad company — it still features a host of positives. The problem is that Boeing’s attributes don’t necessarily justify the swing we’ve seen.

The story for Boeing has been driven by Trump and his military plans, but investors might have gotten ahead of themselves. BA isn’t a 100% pure defense firm. In fact, not even a third of its revenues come from military warplanes and equipment.

Last year, only about 23% of Boeing’s revenues came from U.S. government contracts, which includes foreign military sales that are done via the U.S. government. So it’s not even 100% based on the Pentagon and various U.S. military branches. The vast bulk of Boeing’s sales are still commercial in nature; those sales are increasingly coming from foreign companies and state-owned airlines.

Thus, Trump is certainly good for Boeing, but we’re not talking about a massive binge. The 737 Max and Dreamliner are still driving the show.

That’s something to consider when looking at BA stock today. Shares of Boeing now trade for 24 times earnings, which is above both the market and the company’s own historical norms. Price-to-sales is even more worrisome; from 2000 to 2016, BA stock on average traded for about 0.85 sales … but today that number is north of 1.1.

Investors clearly are giving Boeing a premium — a problem considering how rare that is.

It’s All About Cash Flow

While BA is clearly expensive and might not live up to its future hype as a hot play on military spend, it’s not necessarily going to crash and burn. Instead, investors should expect more muted gains unless World War 3 breaks out with North Korea.

But that doesn’t mean Boeing stock is without appeal.

Boeing’s cash flows are robust as production and orders for its commercial plans churn. While the company has experienced some hiccups here, production has been swift, and recent cost-cutting measures have paid off. During its recently reported quarter, Boeing tripled its free cash flow over the prior year’s comparable quarter. That follows a general upward trend of BA minting cash over the past few quarters.

That cash is being used to buy back an impressive amount of stock, as well as juice the dividend. Boeing amped up its quarterly payout by 30% earlier in 2017 to $1.42 per share, and over the past decade, the dividend has ballooned by 255%.

A long story short: If the military narrative wanes, there’s always the prospects of buying Boeing for the income and dividend growth potential.

Bottom Line on BA Stock

In the end, investors jumping into Boeing for more torrid gains might be sadly mistaken. There’s just only so much military spending can and will do for Boeing’s fortunes … and a lot of that has already been baked into the stock.

However, those who are OK with slower long-term gains with a healthy mix of dividends will find that BA stock, at a 3% yield and sporting high dividend growth — still has plenty to offer.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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