Here's Why The Boeing Company Deserves its Place on the Dow

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) has been America's most-watched market index for decades, despite -- or perhaps because -- of its narrow focus on a mere 30 stocks. Where other indices might track 500, or 2,000, or even 5,000 different stocks, the Dow's steady focus on 30 business bellwethers has made it both easier to understand and easier to dismiss as a relic of simpler times. But as long as the Dow remains front and center in every day-to-day market analysis, the index and its components will remain the most important barometers of American markets.

Source: Lamb family via Flickr.

That's why it's important to understand not only the Dow, but its components as well. What do they do? What do they represent on the Dow, and why do they matter to the American economy? Where have they come from and where might they be heading in the future? Today we'll dig into the details of Boeing  (NYSE: BA  ) to find answers to these questions and more, so that we can understand not just what moves the Dow, but why.

Boeing at a glance

  • Founded: July 15, 1916.
  • Joined the Dow: March 12, 1987.
  • Current Dow weighting: 5.2% (5th-largest weighting).
  • Replaced: Inco (removed to reduce index reliance on metals).
  • Also a Dow component from: 1930 to 1932 (as United Aircraft and Transport).
  • Sector represented: Industrial (aerospace and defense).
  • Rank (by revenue) among all industrial stocks:
    • o 1st place (Fortune 500, aerospace and defense, 2012)
    • o 1st place (Forbes Global 2000, aerospace and defense)
    • o 3rd place (Washington Technology Top 100 government contractors)

Boeing has been at the forefront of the aviation industry since World War I, thanks to founder William Boeing's passion for building and flying better aircraft than the primitive contraptions then available. Boeing has been a military contractor since the very beginning, as its first major order came from the U.S. Navy once the United States entered the war in 1917.

Boeing survived the post-war aviation crash thanks to William Boeing's ample financial resources, and by the mid-1920s it had begun to grow into what might have been the nation's only aviation monopoly. Boeing assembled the United Aircraft and Transport Co. in 1929 by combining with other major aviation enterprises of the day, and this new company soon dominated both manufacturing and transport, as its name implies. The company was broken up by act of Congress in 1934, and its three major segments became Boeing (the western manufacturing operations), United Aircraft (the eastern manufacturing operations, today known as United Technologies  (NYSE: UTX  ) ), and United Air Lines, which has been one of the world's largest commercial airlines for decades and merged with Continental in 2010 to become United Continental (NYSE: UAL  ) .

Boeing has been behind a number of important aviation breakthroughs, either directly or as a result of acquiring the company responsible. It's particularly known for helping launch the age of commercial passenger jets (the Jet Age) with the 707, and for greatly expanding passenger jet travel with the iconic 747. Today there are over 12,000 Boeing commercial jetliners in service globally, accounting for roughly 75% of the world's combined commercial airline fleet, and it delivered 217 commercial jets to customers around the world within the first four months of 2014. Boeing's defense segment is a monster in its own right, with over $7 billion in government contracts  awarded in fiscal 2012 alone and with total segment revenue nearing $33 billion in 2013.

Despite being a smaller company by market cap than many of its lower-weighted Dow peers, Boeing undoubtedly deserves its heavy weighting, as civilian aircraft -- of which Boeing is by far the No. 1 U.S. manufacturer -- are consistently the largest (or second-largest) category of goods exported from this nation by market value. In the first four months of 2014, civilian aircraft accounted for nearly 10% of all capital goods exported from the U.S.

Boeing by the numbers

BA Chart

BA data by YCharts.

  • Ten-year share price growth: 182%
  • Ten-year dividend growth: 265%
  • Total return (with dividends reinvested): 250%
  • Average P/E over the past decade: 20.8 
  • Current P/E premium over average P/E: 12%

BA Revenue (TTM) Chart

BA Revenue (TTM) data by YCharts.

  • Annualized revenue growth (past five years): 5.7%
  • Annualized EPS growth (past five years): 13.4%
  • Annualized free cash flow growth (past five years): 8.2% (from end of 2009)
  • Change in profit margins (past five years): 40% improvement

Considering Boeing's size and maturity, its ability to boost its margins and thus its earnings per share at a far greater rate than its revenue is nothing short of impressive. Most of this growth has come from the commercial side of Boeing's operations -- its defense segment has been chugging along with between $32 billion and $34 billion in annual revenue for the past five years, while commercial jet sales grew from $34 billion in 2009 to $53 billion in 2013.

Boeing is extraordinarily optimistic about the future of commercial aviation, as its current market outlook calls for 5% annual growth in both passenger traffic and cargo transported for the next 20 years, which will produce demand for 35,280 new airplanes with a market value of $4.8 trillion. Even if Boeing only fulfills 60% of this global demand, it would still wind up with $400 billion in new orders every year through 2032, which seems a bit optimistic, to put it mildly. Even so, Wall Street's analysts are quite bullish on Boeing, as they expect the company to grow its EPS by 10.4% annually for the next five years.

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