Will Boeing's Dividend Crash in 2013?

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The American aerospace and defense systems giant, Boeing (NYSE: BA), has shown a lot of promise in the last couple of years. Boeing’s latest earnings clearly depict its healthy financial position. While the company has been very profitable, it hasn’t shown a great intent in returning shareholders’ wealth.

Q4, 2012 has been an exception, the company declared a dividend of $0.484, which is almost 10% greater than its previous dividend. Boeing’s stock hasn’t been that attractive when it comes to capital gains, so the company has largely been a dividend play. Before investing in Boeing, the question which comes to mind is, will Boeing keep on performing the way it has performed in 2012? The answer seems quite easy but when we get into the details, we get to know that it’s more complicated than that.

Valuation

Boeing has a forward P/E of 14.93x and an expected EPS of $5.09 (Dec, 2013). It has a dividend yield of 2.50%, PEG of 1.28 and a growth rate of 11.66%. Using this PEG, growth and dividend yield, we arrive at a PEGY of 1.05. Boeing’s PEGY shows that it’s almost fairly priced at $75.97.

<table> <tbody> <tr> <td colspan="5"> <p><strong>Boeing</strong></p> </td> </tr> <tr> <td> <p>Forward P/E (1 yr)</p> </td> <td> <p>Expected EPS</p> </td> <td> <p>PEG</p> </td> <td> <p>Growth</p> </td> <td> <p>PEGY</p> </td> </tr> <tr> <td> <p>14.93</p> </td> <td> <p>5.09</p> </td> <td> <p>1.28</p> </td> <td> <p>11.66</p> </td> <td> <p>1.05</p> </td> </tr> </tbody> </table>

Recent Advancements

The company has plans of using state of the art technology in its upcoming aircrafts and defense systems. Recently, Boeing said that it would be developing a highly sophisticated method that would enable it to test wireless signals in its airplanes. This would mean enhanced connectivity for passengers’ personal electronic devices. Interestingly, Boeing used potatoes to test out in-flight wireless signals on its jets. The Company has its eyes set on a new satellite system (TDRS K), which will assist NASA in improving communication with its spacecraft orbiting around the Earth. John Leuer, Boeing’s TDRS program leader, announced that the new system would be more cost efficient and more reliable. The company will launch the system somewhere in 2015.

Aerospace Division

Boeing’s latest aircraft, Boeing 737-max, which is all set to hit the market in 2017, has received an amazing demand from airlines throughout the world. The company has already received 969 orders as of November. With the advent of Boeing's 787 Dreamliner, the company expects even more in the years ahead. As of November, the company has 844 orders placed for its premier aircraft, 525 orders for the 787-8 version and 319 orders for the 787-9 version. Dreamliner’s arch rival, Airbus‘s A350 is lagging behind with 562 orders till now.

Moreover, Airbus won’t be able to deliver its first fleet of aircrafts (A350) until 2014, so till then, Dreamliner should cash in on this huge market. It is true that the company has faced some serious criticism for delaying its deliveries in the last few years; it looks like the company has finally managed to do justice with its production efficiency. A total of 35 aircrafts have already been delivered in 2012, as compared to only 3 aircrafts in 2011. Deliveries are of foremost importance to the company, as 40% of cash is collected from the customer on delivery.

Electronic Issues With Dreamliner

Currently, United Airlines and All Nippon Airways are Dreamliner’s biggest clients with 50 and 66 orders respectively. United airlines just reported an electrical problem in one of its Boeing 787s, which makes a total of three Dreamliners to have suffered the same problem. Earlier, Qatar Airways announced that it had grounded a commercial 787 due to the same electrical issue. Qatar Airways CEO, Akber Al Baker, said that “We will demand compensation we are buying planes from them to use them, not to put in a museum." He further said “Boeing needs to get their act together because the delay of more than three years in delivery forced us to slow our expansion plans.” A strong negative comment of this sort shouldn’t be taken lightly.  At the moment, 787 can enjoy the buffer created by A350, which won’t be able to hit the market until 2014.

Defense Systems

Boeing is currently the market leader in commercial aircrafts' business but when it comes to defense systems and space exploration, it faces very tough competition from Lockheed Martin (NYSE: LMT). LMT’s currently trading at $92.77 and has a YTD return of almost 20%. It has a forward P/E of 11.30x and its PEG is 2.23. Incorporating a growth of 5.1% in its PEG, we get to a PEGY of 1.1, which means it’s also trading at its fair value. Its forward EPS (Dec, 2013) is $8.22 which is 61% greater than Boeing’s EPS. The thing which makes Lockheed’s stock more attractive than Boeing’s stock is its dividend yield of 5%. Even with a dividend increase of 10% in the latest quarter, Boeing’s yielding less than Lockheed on its dividend.

<table> <tbody> <tr> <td colspan="5"> <p><strong>Lockheed Martin <span class="ticker" data-id="204339">(NYSE: <a href="http://caps.fool.com/Ticker/LMT.aspx">LMT</a>)</span></strong></p> </td> </tr> <tr> <td> <p>Forward P/E (1 yr)</p> </td> <td> <p>Expected EPS</p> </td> <td> <p>PEG</p> </td> <td> <p>Growth</p> </td> <td> <p>PEGY</p> </td> </tr> <tr> <td> <p>11.30</p> </td> <td> <p>8.22</p> </td> <td> <p>2.23</p> </td> <td> <p>5.1</p> </td> <td> <p>1.1</p> </td> </tr> </tbody> </table>

Conclusion

With Boeing’s 787 arrival, Boeing’s aerospace unit will continue to generate profits in the coming years. Boeing will just have to fix Dreamliner’s squawks as soon as possible without hurting its global image. 2013 might well be the year where 787 could become Boeing’s biggest cash generator. Moreover, a one year head start should be enough for Dreamliner to beat the upcoming A350. As far as Boeing’s defense system is concerned, they are second to Lockheed Martin. With the fiscal cliff on its way, more defense cuts are expected in the year ahead, meaning lesser profits. The bottom line is that Boeing’s aerospace segment would certainly do well in 2013, but its defense systems’ unit would get a small hit due to the budget cuts. As a result, it would be difficult for the company to sustain its current dividend. According to my analysis, it would pay out a dividend around $1.80 in 2013. With more dividends expected in 2013, Lockheed Martin is certainly a far better buy in the defense systems’ industry.

 


Vamosrafa7 has no positions in the stocks mentioned above. The Motley Fool owns shares of 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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