In the past few years, Boeing (BA 0.01%) has built a reputation as a great stock for income-seeking investors to hold. Just since 2013, the company has nearly tripled its quarterly payout from $0.485 to $1.42.
If history is a guide, Boeing will announce another dividend increase next week. Based on its stellar 2017 cash flow performance, the company is likely to give investors a generous income boost for 2018.
Boeing accelerated its dividend growth last year
From 2013 to 2015, Boeing began to moderate its dividend growth rate. After increasing its dividend by 51% in 2013, the company boosted its payout by 25% in 2014 and 20% in 2015.
Boeing has increased its dividend rapidly in recent years. Image source: Boeing.
At this time last year, I expected Boeing to continue that trend in 2016, raising its dividend by 15%-20%. By contrast, some analysts expected an increase of as much as 50%. Ultimately, Boeing implemented one of its biggest dividend increases ever, raising its quarterly dividend by 30% to $1.42.
Based on Boeing's 2016 year-end share count, this move put the company on the hook for annual dividend payments of nearly $3.6 billion. That was equivalent to roughly 45% of its 2016 free cash flow, which totaled $7.9 billion.
No reason to stop now
Given that Boeing's board was willing to raise the company's dividend by 30% last year -- after Boeing grew free cash flow by 14% during 2016 -- it seems likely to approve another significant increase for the upcoming year.
First, Boeing's dividend yield has plunged over the past 12 months, simply because Boeing stock has gained more than 75% since the company announced its last dividend increase a year ago. Based on Boeing's current payout and stock price, the yield is barely above 2%, compared with about 3.6% right after the announcement last December.
Boeing stock performance and dividend yield, data by YCharts.
Second, Boeing's cash flow has surged during 2017. Through the first three quarters of the year, Boeing produced free cash flow of $9.1 billion, up 62% year over year. The company has also raised its full-year cash flow guidance multiple times.
As of October, Boeing's full-year guidance called for operating cash flow of about $12.5 billion, along with $2.0 billion of capital spending. That would imply free cash flow generation of approximately $10.5 billion, up 33% year over year. Meanwhile, the annualized cost of Boeing's current dividend has declined to around $3.4 billion, because of the company's share repurchases. That means Boeing has the flexibility to implement a meaningful dividend increase.
Time to bring the yield back up
Despite the huge increase in its free cash flow this year, Boeing sees lots of upside for cash flow. On the company's Q3 earnings call, management reiterated its long-standing forecast that cash flow will grow each year through the end of the decade.
As a result, even if capital spending ticks up again in 2018, Boeing could generate free cash flow of around $11 billion. It can thus easily afford to raise its dividend by another 20%-30% for the upcoming year.
At the high end of that range, Boeing would still be paying out just $4.4 billion a year -- or less if you account for the company's likely share-repurchase activity. Most investors would agree that paying a dividend equal to 40% of free cash flow is entirely reasonable.
By raising its dividend 20%-30%, Boeing would boost the yield on its stock to 2.5% or more. (Of course, that assumes no change in the stock price.) I expect Boeing's board to do just that at its upcoming meeting. And if Boeing meets its future cash flow targets, there will be plenty of room for additional dividend increases after 2018.
