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What Investors Are Overlooking With The Boeing Co.'s Large Dividend Increase

By Daniel Miller - Dec 21, 2014 at 9:15AM

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We all love cash, especially when a company like Boeing increases its dividend by 88% over the past two years. If investors dig deeper, the big picture might be even brighter. Here's what many are overlooking.

First, let me briefly recap the significant news from The Boeing Co. (BA 1.26%) before explaining two things investors might be missing.

Boeing chairman and CEO Jim McNerney announced this week that the company's authorization for its share repurchase program increased to $12 billion. McNerney also announced that Boeing increased its dividend by a healthy 25% to $0.91 per share. Put another way, Boeing has increased its dividend by 88% over the past two years, and by 192% over the past decade.

Graph by author. Data source: Boeing. 

This clearly demonstrates Boeing's confidence in its bright future, but that's where most articles covering the news stop. Here are two specific things that Boeing might be confident enough about in the near-term to be dishing out this much more value to shareholders through share buybacks and dividend increases.

Defense business bottom?
Through three quarters of 2014, Boeing's revenue generated from commercial airplanes increased nearly $5 billion compared to the previous year. That easily offset the $1 billion decline from Boeing's defense, space, and security segments. However, digging a little deeper, the graph below tells a better story. Boeing's future production, its massive backlog of orders -- which equals roughly seven years of production -- has continued to reach record highs despite the government's budget-cutting orders for Boeing's defense, space, and security products.

Graph by author. Data source: Boeing.

Here's the kicker, though: While Boeing's defense, space, and security contribution to the total backlog has declined, the segment's revenue and earnings from operations actually rose in the third quarter compared to last year. While that's just one quarter's result, a slightly bigger picture shows a positive trend as well.

Through the first nine months of this year, as Boeing continued to cut costs and improve its operations, its earnings from defense, space, and security only declined $65 million, despite working with more than $1 billion less in revenue. In other words, Boeing's defense, space, and security operating margins improved 10 basis points through the first nine months of 2014, but jumped a significant 240 basis points, from 8.4% to 10.8%, in the third quarter.

What all this suggests, along with Boeing's commitment to significantly raising its dividend and share repurchase program, is that Boeing's declining defense, space, and security business segment may have bottomed and could continue the third quarter's trend of increasing revenue and profits.

Show me the cash!
Boeing's substantial dividend and share repurchase program also shows management's confidence that its cash flow will remain strong -- but why? First, let's take a look at its operating cash flow over the past few years.

Graph by author. Data source: Boeing.

Boeing raised its guidance for operating cash flow during the third-quarter presentation to again check in above $7 billion for the full year. It's clear Boeing believes its strong cash flow is here to stay, but this could also suggest that the company has made significant progress on its massively underfunded pension plan.

Graph by author. Data source: Boeing.

For a little context on how big an obligation Boeing's pension plan has been, consider that as recently as 2012 its pension obligation was a liability nearly twice the size of its total consolidated debt at the time, of $10.4 billion -- and that debt figure includes $2.5 billion contributed by Boeing Capital.

As interest rates rise, which are linked to discount rates that set Boeing's pension plan obligations, it will substantially lower the company's net pension liability. That, in combination with Boeing pouring roughly $1.5 billion into the fund each of the past two years, will free up more cash to be distributed to shareholders.

Investors will hear more about Boeing's pension fund in the fourth-quarter presentation, and this significant increase in Boeing's dividend and share repurchase suggests the company has again decreased its pension obligation significantly.

The upshot
Another thing Boeing's dividend increase could mean is that management has more confidence the 787 Dreamliner program will in fact turn cash flow positive next year. That would significantly help Boeing's financial performance, especially as 787 production has been accelerated to 10 per month.

Ultimately, Boeing's 88% dividend increase and expansion on its share repurchase program signal confidence across its entire business. It also signals that Boeing could have made significant progress cutting costs to juice its defense segment's results, and taken a huge chunk out of its pension obligation. Both would be big wins for investors. 

Daniel Miller has 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.

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