Even A Higher Dividend Doesn't Make This Stock A Buy

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I'm a big fan of dividends, and generally whenever a well established company raises its dividend I take notice. I recently read in a Fox Business article that Boeing (NYSE: BA) announced they were increasing their dividend by 10%, and reinstating a $3.6 billion share repurchase program. While these are positive moves, and will benefit shareholders, Boeing has a lot to prove if it wants to win investors confidence. To be blunt, Boeing suspending its share repurchase program very close to the time when a share buyback would have been most beneficial. The company's dividend increase is also something the company has been relatively stingy with. Compared to other companies that will benefit from the strong demand for Boeing's jets, management needs to do more for shareholders.  

Demand Is Huge, But Others May Benefit More

To be fair, Boeing has a huge backlog of jet orders (to the tune of 3,900 at last count), and this huge backlog should generate good earnings and cash flow over the next several years. Not only will Boeing benefit, but other suppliers like United Technologies (NYSE: UTX) and General Electric (NYSE: GE) will also gain from the extra demand. I would even make the argument that both Boeing and Lockheed Martin (NYSE: LMT) should benefit from any positive resolution to the current "fiscal cliff" debacle in Washington. Since both companies get part of their business from military sales, any avoidance of the automatic spending cuts should be a positive development. Here is the thing, either of these suppliers, and even Lockheed could end up being better investments than Boeing. Boeing should be the best stock of the group, but unfortunately for investors, management's reputation says that probably won't be the case. 

Boeing's Reputation Precedes It, And That's Not A Good Thing

I know that past history doesn't predict future results, but in many cases it can give good insight into how management feels about rewarding shareholders. I've found if management consistently puts shareholders first, when business improves the shareholders usually benefit. However, the reverse holds true as well. If a company doesn't show a history of thinking of shareholders first, it's usually a good bet they will be left behind if fortunes improve. This is the crux of the problem at Boeing. In the last few years, Boeing has raised its dividend less than its suppliers and competition. In addition, the company has been consistently issuing shares instead of repurchasing shares. Each of the other companies I've mentioned has been a net purchaser of their shares in the last few years. This is why a 10% dividend increase, and a long overdue share repurchase program still might not be enough. 

It's All About Giving Back

One way to determine how much a company values its shareholders, is its level of dividend payout and share repurchases over the last year. While some calculate just the dividend payout ratio, I like to look at the combination of dividends and share repurchases for what I would refer to as shareholder yield. In the last year, the co-leaders of the group we are looking at are General Electric and Lockheed Martin. Both of these companies returned over 59% of their free cash flow to shareholders through dividends and share buybacks. By comparison, Boeing and United Technologies returned 26.62% and 21.80%, respectively. However, the big difference is while United Tech. returned less, they also made one of the largest acquisitions in the company's history by agreeing to purchase Goodrich. Without this purchase, their history says that they would have returned much more to shareholders. Over the short-term, Boeing underperforms each of the other companies when you include this factor in United Tech.'s results. 

History Is A Pretty Good Teacher

Looking at a longer timeframe, we find that Lockheed and United Tech. lead the pack with over 59% of their free cash flow returned to shareholders in the last three years on average. Boeing once again comes in third with 56.05%, and General Electric comes in last with 52.25%. However, again there is a caveat. GE faced one of the largest challenges the company had ever faced because of the Great Recession. GE Capital had grown so large that the terrible results in this division caused GE to cut their dividend for the first time in decades. The fact that GE only lagged Boeing by a small margin even with this huge issue, shows that if GE Capital had not grown as large, it's possible Boeing would have landed in last place again. 

Surprise, Boeing Is Last Again

Even with the recent 10% increase, Boeing's yield lags the other three stocks we've looked at. Based on a new annual payout of $1.94, the company's yield is now 2.55%. Considering that United Tech. pays 2.57%, GE pays 3.61%, and Lockheed pays nearly 5%, this 10% increase is good, but not nearly enough. When you consider that even after this increase, Boeing's free cash flow payout is just 32.57%, you can see there is room for more improvement. Shareholders have been patiently waiting for better results, but it looks like they will have to wait a bit longer. 

Conclusion

As you can see by multiple measures, Boeing isn't exactly running to reward investors. In fact, of the four companies, Boeing is the only one to be a net issuer of stock in the last three years. This means in order for Boeing's share buyback to be equally as effective, they need to retire all of the shares they have issued in the last few years first, and only then will they be net purchasers of their stock. Suspending a share buyback before the Great Recession, and then reinstating it several years after might be the best example of how not to handle share repurchases. The bottom line is, Boeing has a lot of work to do if they are going to prove that investors should trust the company's judgment. Considering that both United Tech. and GE both have similar growth profiles and better yields, they should easily be better investments. Even Lockheed could do better because of its significantly higher yield and commitment to shareholder value. This 10% dividend increase and share repurchase from Boeing just isn't enough. 


MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company and Lockheed Martin. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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