Boeing Jet Deliveries Unleash Cash to Reward Shareholders
Boeing Co. (BA), after investing heavily in new jet designs, may see free cash flow as much as double during the next three years to $18 billion, raising the prospect of bigger dividends or stock buybacks.
A record backlog of commercial-jet orders is setting up Boeing for a surge in cash as the Chicago-based planemaker cranks up production and trims spending for aircraft development programs such as the 787 Dreamliner.
That gives Boeing the ability to increase its dividend or begin its first new buyback plan in five years. The company may announce the purchase of $3 billion of its own stock, equal to about 5 percent of the total outstanding, as soon as the fourth quarter, said Peter Arment, a Sterne Agee & Leach Inc. analyst.
“If Boeing is able to execute successfully on this significant production ramp in front of them, they’re going to have a high-class problem of generating a tremendous amount of excess cash,” said Arment, who is based in Birmingham, Alabama, and has a buy recommendation on the stock.
Free cash flow, or cash from operations minus capital spending, will total $18 billion from 2012 to 2014, compared with $8.5 billion in the three years ended in 2011, Arment estimates. Carter Copeland, a Barclays Plc analyst in New York, projects the total will be $14 billion in the next three years.
“One of the reasons we own the stock is that strong cash flow generation which will accrue to shareholders over the next several years,” said Chris Wolters, a managing director with Epoch Investment Partners in New York.
Boeing is done with major development of the 787 and 747-8 jumbo jet and is focused now on new variants of existing planes. The planemaker is working to raise production 40 percent by the end of 2014, which is significant for revenue because airlines make about 40 percent of their payments upon delivery.
Converting a 3,953-jet backlog into cash is the “top priority” for Boeing’s commercial business, Chief Executive Officer Jim McNerney said. The money will go to small acquisitions and technology and be returned to investors, he said in a May 15 presentation, without giving details.
“Cash flow is improving with the increase in commercial airplane deliveries,” Chaz Bickers, a Boeing spokesman, said in a telephone interview. “There has been some decrease in R&D as we come off the peak of the 787.”
Boeing hasn’t been in this kind of sweet spot since the late 1990s, after the 777’s 1995 debut. As the 787 fell more than three years behind schedule before entering service in 2011, and as the investment in the plane rose to what Arment estimated is about $20 billion, Boeing halted buybacks and left the dividend unchanged.
With a combined payout yield for dividends and repurchases of 2.3 percent from last year, Boeing ranked 292nd on the Standard & Poor’s 500 Index, based on data compiled by Bloomberg. Its $1.2 billion payout was 102nd, while its market value was No. 49.
Boeing may announce a dividend increase to 49 cents a share in December from the current 44-cent payout, according to a Bloomberg projection. The company last raised that amount in December 2011, the first jump since 2008. Boeing left the payment unchanged yesterday.
“As an investor I like to see the dividend increases,” said Gary Flam, a partner at Bel Air Investment Advisors in Los Angeles who helps manage about $6.5 billion, including Boeing stock. “It’s a stronger sign of faith in your underlying business than a share repurchase.”
Higher dividends lock Boeing into returning cash to shareholders because the payments can’t be reduced without negative fallout, Flam said. Share repurchases can be stopped at any time, he said.
Boeing stock shows the strain of delays on the 787, the first jetliner built chiefly of composite materials. The shares tumbled 30 percent through today since the day before the first Dreamliner postponement, in October 2007. That was almost twice the drop in the S&P 500 Index in the same period, and trailed the 16 percent gain for Airbus SAS parent European Aeronautic Defence and Space Co.
The stock fell 0.2 percent to $70.93 at the close in New York. The shares have dropped 3.3 percent this year, while EADS, based in Paris and Munich, has gained 7.5 percent.
Boeing’s bonds yield an average of 1.66 percent, less than the 1.93 percent for EADS and 2.75 percent for all companies in the Bank of America Merrill Lynch Global Large Cap Capital Goods & Building Materials index.
The planemaker’s last share-repurchase announcement was for $7 billion in October 2007, and Boeing spent only $3.4 billion and has $3.6 billion pending in the program. In the previous three years, Boeing had spent $8 billion on buybacks, according to a 2007 company statement.
“I would expect that the company leans more toward first returning cash to investors through share repurchases,” said Copeland, the Barclays analyst, who has an overweight/positive rating on the stock. “Share repurchases have been a part of the balanced cash deployment strategy we’ve seen in the past, and they’ve since eliminated that.”
Some of Boeing’s cash will have to be pumped into its retirement funds as pension liabilities rise because of low interest rates. Boeing expects to contribute about $1.5 billion in cash to its pension plans in 2012 and said the amounts may rise in future years, according to a Feb. 9 filing.
The company also may face pressure to deploy cash to bolster profits at its defense unit, which accounted for 47 percent of 2011 sales, as U.S. military spending shrinks, said Alex Hamilton, an EarlyBird Capital analyst in New York.
“With the looming defense cuts, they should hold on to their cash and invest it internally,” Hamilton said. “You’re going to get better returns.”
Boeing has reduced its ratio of total debt to earnings before interest, taxes, depreciation and amortization to 1.7 times last year from as high as 5.2 times in 2003. The ratio at EADS is 1.6. And its current crop of aircraft programs will be less costly than the 787 and the 747-8. That should allow Boeing to boost profit, according to Copeland.
The 737 MAX will have new engines, a sturdier structure, a modified tail and winglets as part of a “very simple” upgrade, Jim Albaugh, chief of the commercial airplanes unit, said at the May 15 conference. It will compete with Airbus SAS’s re-engined A320neo, which gobbled up orders last year.
An overhaul of the wide-body 777, for which airlines have been clamoring, probably will involve new engines and composite- plastic wings. That plane probably will come after a stretched version of the Dreamliner, Albaugh told reporters at a briefing in Beijing on June 11.
Production increases are under way for the 737 and 777.
Output for the wide-body 777 is scheduled to increase to 8.3 a month by early 2013 from seven now, and the 737 will climb to 42 in 2014 from 35. The 737 makes up the biggest chunk of Boeing’s outstanding orders, with 2,605 in the backlog through May.
Even more important will be meeting targets for the Dreamliner, whose composite construction and supplier network were blamed for the delays on the plane. Only this month did Boeing assemble the first 787 that won’t require changes at a post-production modification center, where 50 of the jets are stacked up for reworking.
Dreamliner monthly production will rise to 10 by the end of next year from 3.5 now, Boeing has said. The model’s order backlog is 843 planes, and deliveries through May totaled 11 planes.
Counting the production increases, revenue growth from the 787 will be more than $6.5 billion in 2013 compared with about $3 billion from the 737 and 777, Yair Reiner, an analyst with Oppenheimer & Co. in New York, wrote in a June 24 report.
Production for the 787 will require $4 billion of working capital this year, which is $3 billion less than in 2011. The 787 program may be cash neutral next year and will add to cash flow in 2014, said Reiner, who has an outperform rating on the stock.
Boeing’s list price for the Dreamliner is as much as $228 million, and buyers typically negotiate discounts from there. The cost of building a Dreamliner probably will drop below the selling price for the first time in 2014’s second half, Sterne Agee’s Arment said. Boeing then will start recovering the investment in the new plane, he said.
“What we would anticipate is the company will go out and repurchase shares as well as modestly increase the dividend,” said Wolters, the Epoch Investment managing director. “That really comes down to them executing the production ramp on the 787.”
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