Boeing (NYSE:BA) doled out a stunning 50% raise in its dividend payout in December last year. It's little wonder, then, that investors expect another significant increase this time around, too.
With huge backlog levels and rising production rates, the company's fundamentals are strong. Third-quarter results have been solid, and there's been an increase in fiscal year 2014's earning forecast. Yet there remains the problem of uncertain cash flow, something that upset investors in the third quarter. Are Boeing's hands too tied down by its current cash flow position to give investors a decent dividend hike?
Boeing's dividend: A perspective
With the exception of 2010 and 2011, Boeing has steadily increased dividend payments every year during the past decade. During the 2012-2014 period, it increased its dividend payout at a compounded annual rate of 28.81%, to $2.92 per share. The company had a payout ratio of 29.9% and 27.4% for 2012 and 2013, respectively.
On paper, all looks good for Boeing in 2014. The most recent third-quarter results have been robust, with the top and bottom lines increasing 7% and 19%, respectively. The company has a huge backlog of 5,703 pending orders.
Looking at Boeing's balance sheet, it gives a fair idea of its financial stability. The company had cash and marketable securities of $10.1 billion at the end of the third quarter of 2014, and its consolidated debt stood at $8.9 billion. This indicates a positive net cash position of $1.2 billion, which provides Boeing with adequate finances for dividend payout and outlays on capital expenditure in the near term.
The company's also in the middle of a share repurchase program. It's already spent $5 billion on buying back 39 million shares by the end of the third quarter, and has a good two years left to complete its outstanding $5.8 billion authorization. The company needn't stretch its resources there. All in all, maintaining the current payout shouldn't be difficult for Boeing.
Where's the cash going?
Boeing reported strong cash flow (before Pension Contributions) during the 2011 to 2013 period at a compounded growth rate of 46.1%, to $9.7 billion. Higher cash flow during the period ensured a steady increase in dividends.
The cash flow scenario has changed considerably in the first nine months of fiscal year 2014, which is ending in December. Boeing has witnessed a 43% year-over-year drop in cash flow from operations. Investments in the 787 Dreamliner program have been cited as the primary reason for the current drop in cash flow.
The 787 Dreamliner is plagued by several technical snags, including engine failures and fuel leaks. Research and development efforts in rectifying the glitches have eroded a chunk of the operating cash.
Boeing's investing in increasing the production rates of its planes. In 2014, it started building 10 Dreamliners a month from seven previously. It's planning another hike to 12 Dreamliners a month from 2016 onward.
It announced an increase in the monthly production capacity of the 737 to 52 in 2018 from the current rate of 42. And it will double its 767 monthly output capacity in 2016. Then there are big development programs under way, such as the 737 Max and 777X.
To implement these plans, Boeing needs to commit a large portion of cash. In the last reported quarter, though Boeing revised its fiscal year 2014 operating cash flow forecast from $7 billion to more than $7 billion, it's still significantly lower than the $9.7 billion it achieved in fiscal year 2013. This is where the dividend growth uncertainty arises for Boeing. The company is faced with the dilemma of either paying a higher dividend, or reinvesting the money in project expansion.
Will it or won't it?
Boeing increased its full-year earnings forecast from $7.90-$8.10 per share to $8.10-$8.30. Assuming the company garners $8.20 in earnings, and pays a dividend of $2.92 per share (disbursed in 2014), the dividend payout ratio for the fiscal year will be approximately 35%. Though Boeing remains a strong dividend payer, it might be too much to expect that it will significantly add to the current payout like last year.
At the same time, it's equally unlikely that there will be no increase at all. A modest double-digit dividend rise could be in the cards. Analysts at Sterne Agee forecast that Boeing could increase its annual dividend by 15% or more. This would bring the yield to 2.7% at current prices, up from the existing 2.3%. It may not be a lot, but still gives investors something to look forward to.
ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.