U.S. aerospace giant Boeing (BA +2.74%) has been a big winner for investors over the past five years. In addition to delivering massive capital appreciation -- the stock price has nearly quadrupled since late 2012 -- Boeing has also increased its dividend at an astounding rate.
On Monday evening, Boeing unveiled its annual capital return program update. As expected, shareholders will get another big dividend increase in 2018, while Boeing will also continue to buy back stock at a steady pace.
The capital return program increases again
Boeing nearly tripled its quarterly dividend from $0.485/share to $1.42/share between 2013 and 2017, including a 30% increase last year. Given this track record of strong dividend growth and Boeing's remarkable cash flow growth -- the company expects to produce about $10.5 billion of free cash flow this year, up from $7.9 billion in 2016 -- the company was well-positioned to implement another big dividend increase for 2018.
Boeing's free cash flow has increased dramatically this year. Image source: Boeing.
Sure enough, Boeing plans to raise its quarterly dividend payment to $1.71 next year. That represents a year-over-year increase of slightly more than 20%, within the range I had expected.
Boeing also announced that it has repurchased $9.2 billion of stock in 2017, utilizing a $14 billion share repurchase authorization approved a year ago. The board has replaced that buyback plan with a new $18 billion share repurchase authorization. The company currently plans to execute these buybacks over a period of 24-30 months. However, if history is a guide, Boeing will probably buy back stock at a faster rate.
The dividend is still quite safe
Analysts currently expect Boeing's adjusted earnings per share to reach $11.09 in 2018. Based on that estimate and four quarterly dividend payments of $1.71/share, Boeing's dividend payout ratio would be 62%. That's on the high side of what most investors consider safe.
That said, EPS isn't the best metric to use when evaluating dividend safety. Cash flow plays a much more direct role in whether or not a dividend is sustainable. Boeing's projected 2017 free cash flow of $10.5 billion works out to more than $17/share. Furthermore, management has stated that cash flow will continue growing through the end of the decade, so Boeing is likely to produce even higher free cash flow per share in 2018.
In other words, Boeing is on track to spend less than 40% of its free cash flow on dividend payments next year. That's very affordable -- and it leaves plenty of room for further dividend growth in the next few years.
Does Boeing stock have more room to run?
Boeing stock has nearly doubled since the beginning of 2017, due to the company's strong cash flow performance and surprisingly robust order activity. On Wednesday morning, Boeing stock topped $295 for the first time ever. It now trades at a lofty earnings multiple: roughly 29 times the average of analysts' 2017 earnings estimates.
That might make Boeing stock seem extremely overvalued. But once again, free cash flow is a better metric to track than adjusted EPS. Boeing trades for less than 17 times free cash flow, making the stock price seem much more reasonable. Furthermore, free cash flow is likely to continue rising for the next few years.
Nevertheless, Boeing shareholders may want to consider locking in some of their gains. While management has promised cash flow growth through the end of the decade, the company may be forced to reduce its production at some point during the 2020s, especially in the event of a broad-based economic slump. Meanwhile, it will have to ramp up investments for its next generation of commercial jets during the upcoming decade.
In other words, free cash flow hasn't peaked yet at Boeing, but it could top out within the next few years. That could eventually trigger a correction for Boeing stock.
