Boeing: "No" to a Share Buyback and "Yes" to a Higher Dividend
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Boeing (NYSE: BA) is in the proverbial "sweet spot" for cash flow and needs to increase its dividend yield to reward its shareholders. At present, the dividend income for the aerospace behemoth is around 2.40%, about average for a stock on the Standard & Poors's 500 Index (NYSEMKT: SPY). The payout ratio, however, at under 30%, is well below the historic payout ratio of around 50%.
The loyal and patient shareholders of Boeing should be rewarded with a dividend hike and most definitely not penalized by a stock buyback program.
Cash flow is already healthy at Boeing and will improve as major research & development costs are over; and the revenues from the 3,953 jet-backlog of orders should be cascading soon. "Cash flow is improving with the increase in commercial airplane deliveries," observed Chaz Bickers, a spokesperson for Boeing. "There has been some decrease in R&D as we come off the peak of the 787." A recent report from Boeing raised its estimates for worldwide sales over the next 20 years to 34,000 planes, about $4.5 trillion, most of which will be the single aisle Boeing 737 or Airbus A320. Over the next three years for Boeing, the amount of cash available is expected to improve to $14 billion.
What needs more improvement is the total return for investors. Last year, Boeing, the largest exporter in the United States, ranked 292nd in the Standard & Poor's 500 Index for its payout yield. The market value of Boeing placed it 49th on the S&P Index.
Boeing should avoid any share buyback programs. While these are advocated by some investors due to the flexibility, the record of corporations in repurchase efforts is abymsal. Boards of directors have a tendency to buy high as the stock price is generally at a lofty level due to the very revenues that have filled the left side of the balance sheet with a surplus of cash.
A sustained series of dividend increases rather than a huge one-time increase or stock buyback program would best serve the interests of shareholders. Boeing last raised its dividend in 2008. While it is true that dividend income locks a company into paying these as a reduction or omission would generate adverse reactions, Boeing has the cash flow and order backlog to sustain any increases well into the future. Moreover, a share repurchase program that was truncated due to adverse developments would be viewed bearishly, too. This is needed: as a dividend paying stock, Boeing ranks in the botton third for members of the Dow Jones Industrial Average (NYSEMKT: DIA).
According to investing legend John Neff, founder of the Vanguard group and creator of the first index mutual fund, dividend income has provided more than 40% of the historic total return of an equity. In 2007, Boeing was trading for over $100 a share. Now it is trading around $70 a share. For owners of Boeing stock over this period, the dividend income has been the only positive return.
Now trading around $74.50, the mean analyst target price for Boeing over the next year is $85.85. Since early May, Boeing has been upgraded three times. The most recent was by Oppenheimer, raising its recommendation for Boeing from "Perform" to "Outperform" with a target price of $90. Boeing needs to resist the allure of a share buyback program at such lofty levels and increase the dividend income for its shareholders who have been receiving a total negative return for years
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