In recent weeks, some people have worried that the stunning drop in oil prices since this summer could crimp demand for jets produced by The Boeing Company (NYSE:BA) and Airbus.
After all, both companies have benefited from surging replacement demand as airlines have looked to swap out older planes for more fuel-efficient models. With lower jet fuel prices, airlines will have less of an impetus to replace their older planes.
Nevertheless, Boeing is projecting solid revenue and earnings growth in the next few years. Earlier this week, Boeing's board demonstrated its confidence by boosting the company's dividend and increasing its share repurchase authorization.
More cash coming to Boeing shareholders
Boeing has been a fairly good dividend stock in recent years. It will be even more appealing to income-oriented investors in the future, as it will raise its quarterly dividend by 25% to $0.91 next year. Based on its recent share price of roughly $127, this equates to a 2.9% dividend yield.
Boeing also announced that it has completed $6 billion in share buybacks this year. This leaves $4.8 billion on its existing share repurchase program. However, Boeing is replacing this with a new $12 billion repurchase plan. The company expects to complete this program in two to three years, which implies that it may buy back $4 billion-$6 billion of stock annually for the next few years.
Why is Boeing so confident?
By simultaneously raising its dividend and expanding its share repurchase authorization, Boeing is signaling its confidence in its short-term and long-term profit prospects. The main justification for this confidence is its massive order backlog.
As of the end of September, Boeing had a record $490 billion order backlog. That's more than five years of revenue at the 2014 level. Most of that is attributable to the commercial airplane segment, which has a backlog of more than 5,500 airplanes, valued at $430 billion.
Airlines and aircraft leasing firms have to place nonrefundable deposits when they order aircraft from Boeing and Airbus. As a result, even if some companies would have been less likely to splurge on new planes if they had known that fuel prices would drop, the risk of widespread order cancellations is minimal.
There could be a slowdown in sales of Boeing's state-of-the-art planes like the 737 MAX and 787 Dreamliner if fuel prices remain low for an extended period of time. (In fact, Boeing has only sold 25 Dreamliners this year net of cancellations.)
However, this isn't a big concern. Boeing's popular 737 and 787 models are pretty much sold out through 2020. One of the biggest barriers to garnering additional orders is the long wait time. Even if Boeing faced a temporary lull in orders, that would just make it easier for it to sell airplanes when demand bounces back.
It's also important to remember that the growth of aviation in developing countries is another key driver of aircraft demand. If oil prices remain at today's lower level, budget airlines in developing countries will be able to offer cheaper flights, stimulating more demand. This should largely offset any potential reduction in aircraft replacement demand.
Plenty of cash coming
Another factor supporting Boeing's increased dividend and buyback is its rising cash flow. In the past two years, Boeing has ramped up production of the new 787 Dreamliner. However, while Dreamliner sales are profitable in accounting terms, Boeing has been selling Dreamliners for less than the cash production cost up until now.
However, Boeing expects Dreamliner sales to turn cash-positive next year. As Boeing and its suppliers raise the production rate and improve efficiency, production costs should continue to fall.
This will turn the Dreamliner into an ever more valuable cash cow over the next five to 10 years. That will support plenty of future dividend increases and share buybacks, delighting Boeing shareholders.