Show Me The Money!
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a recent Bloomberg article, the writer suggested that Boeing (NYSE: BA) could be a good investment because the company is expected to see much higher cash flow in the next several years. Specifically, the expectation is the company's free cash flow would rise to as much as $18 billion over the next three years, compared to $8.5 billion in the last three years. The reason this would matter to investors is, increased free cash flow should mean increased dividends as well as increase share repurchases. My concern is, Boeing has not shown the willingness in the last several years to utilize its cash this way, and I fear investors may be in for disappointment.
The reason Boeing is expected to have much higher cash flow, is the company has a record backlog of commercial jet orders, and is trimming spending on existing aircraft development. To be specific, at this time, Boeing has 3,953 jets in its backlog. The majority of this outstanding backlog is, 737 models with over 2,600 orders. Production of these planes is expected to increase from 35 per month to 42 per month by 2014. The new 787 series, has about 843 planes on backlog, and production in this category is expected to rise from 3.5 planes per month to over 10 in the next several years. This all sounds like really good news for Boeing shareholders, as 40% of payments for planes are made upon delivery. If Boeing can increase production to meet this large need, the company should see significant cash flow in the next several years. Investors should benefit as the company could return this additional cash to shareholders. However, there seems to be one big hole in this theory, and that is the way the company has utilized its cash over the last few years.
In the last three years, Boeing's average operating cash flow has been around $4 billion. During the same timeframe, the company's average capital expenditures have been $1.3 billion. In my eyes, this leaves about $2.7 billion each year available for dividends and share repurchases, however on average the company has paid $1.2 billion in dividends. Additionally, the company has not spent any significant amount of money in the last three years on share repurchases. This statistic was actually pointed out in the previously mentioned article, as the plane makers last share repurchase announcement was $7 billion in October 2007. Since this time, the company has spent $3.4 billion and still has $3.6 billion of this repurchase agreement pending. By my calculations, this means the company actually had $4.5 billion available in the last three years, that could have been used on share repurchases. During this timeframe, the only significant action the company has taken to improve itself, is Boeing paid down approximately $2 billion in long-term debt. Comparing Boeing's actions to its competition is instructive, to see what the company could have accomplished if it chose to do so.
A perfect example is Lockheed Martin (NYSE: LMT). Lockheed actually has seen very similar free cash flow availability compared to Boeing. However in the last three years, Lockheed has repurchased at least $1.8 billion worth of shares every year. Additionally, Lockheed has increased its dividend each of the last three years while Boeing's dividend has remained relatively flat. Another good example is Northrop Grumman (NYSE: NOC). Northrup is operating with a lower free cash flow base of about $1 - $2 billion per year, however the company has repurchased between $1 billion and $2 million worth of shares each of the last three years. Northrup in my eyes is not an attractive investment, given the company is expected to have flat earnings growth over the next several years, Lockheed Martin is a different story. While Lockheed's earnings growth of 6% isn't tremendously impressive, what is impressive is the company's dividend and dividend growth. Lockheed's current yield is 4.59%, versus Boeings current yield of 2.37%. To be quite blunt, Boeing would actually need to nearly double its dividend in order just to match the current yield that Lockheed Martin is already paying investors. To me, there's no reason to buy Boeing, even if this increased production is met, because the company has not proven that it's willing to return this additional cash to shareholders. Given that Lockheed's dividend is so much higher, and the fact that the company has more than doubled its dividend while Boeings dividend has stayed basically flat, it seems a no-brainer to buy Lockheed stock instead.
MHenage owns shares of Lockheed Martin. The Motley Fool owns shares of Lockheed Martin and Northrop Grumman. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.