Boeing Company (NYSE:BA) Dividends: Dreamliner Scores?

While traditional dividend analysis focuses on dividend payout from net income, we focus on the cash flow coverage of dividends (paid to the common stock) in order to determine their quality and sustainability. We assess whether dividends are being paid from operating, investing and issuance cash flows or whether the beginning cash balance is needed to make this payment. We make the assumption that cash dividends are paid only after net debt repayments. We consider the cash outflow from share buybacks to be discretionary and thus ignore its impact on cash required to support the dividend policy.

Dividends that are fully covered from operating and investing cash flow net of any cash outflow from debt repayments and net of a decrease in deposits (for banks) are considered to be “high quality”. Those that require an additional net cash inflow from issuance are categorized as “medium quality”. If operating, investing and issuance cash flows are not sufficient to fund the dividend and the beginning cash balance is used, the dividend is referred to as “low quality”.

This last category is most at risk of a dividend cut though we recognize that companies that have a large cash balance could continue to pay dividends even with a “low quality” dividend profile. For all these definitions, we assume the cash outlay for share buybacks is discretionary and can instead be used to support dividends.

All 7 peers for the company are dividend paying stocks. Over the last twelve months (prior to 2012-06-30), BA-US’s dividend payout of 29.7% and the corresponding dividend yield of 2.5% (relative to the current price) compare to a peer median level of 32.7% and 2.7% respectively. Relative to its peers, the firm is generating a median dividend yield with a median dividend payout, which suggests a proper dividend level based on this traditional analysis.

The source of the company’s cash to support the dividend paid over the last twelve months is operating cash flow (coverage of 4.0x), investing cash flow (coverage of -1.5x), issuance cash flow (coverage of -0.4x) and twelve-month prior cash (coverage of 6.9x), for a total dividend coverage of 9.0x. BA-US’s issuance cash flow includes outflows from net debt repayment (coverage of -0.4x).

These coverage ratio factors imply that the firm’s dividends are wholly paid from operating and investing cash flows net of any debt repayments, which suggests a high dividend quality. BA-US’s dividend quality is in line with a majority of its peers, which comprise 6 high quality and 1 medium quality.

BA-US has paid a dividend in each of its last five years. The distribution of dividend quality over this period consists of 3 high and 2 low. In particular, the dividend paid in 2011 was of high quality, compared to a low quality dividend in the prior year.

While the dividend yield is similar to the peer median, it is of high quality in this period. Assuming the cash dividend paid remains constant, the high quality coverage would need to deteriorate by 51% before cash from issuance is needed to fund the dividend payment.

Thus, the level of deterioration in operating performance would have to be quite severe suggesting that the current dividend quality is relatively robust. The ending cash balance, with a dividend coverage of 8.0x, provides a substantial cushion in case of a significant reduction of cash flows in the future.

The Boeing Co. is an aerospace company, which manufactures commercial airplanes and defense, space and security systems. The company offers commercial and military aircraft, satellites, weapons, electronic and defense systems, launch systems, advanced information and communication systems, and performance-based logistics and training. The firm operates its business through three segments: Commercial Airplanes, Boeing Defense, Space & Security and Boeing Capital Corporation. The Commercial Airplanes segment develops produces and markets commercial jet aircraft and offers a family of commercial jetliners designed to meet a broad spectrum of passenger and cargo requirements of domestic and non-U.S. airlines. This segment also offers aviation services support, aircraft modifications, spares, training, maintenance documents and technical advice to commercial and government customers worldwide. The Boeing Defense, Space & Security segment’s operations principally involve the research, development, production, modification and support of products and related systems, such as global strike systems, including fighters, bombers, combat rotorcraft systems, weapons and unmanned systems; global mobility systems, including transport and tanker aircraft, rotorcraft transport and tilt-rotor systems; airborne surveillance and reconnaissance aircraft, including command and control, battle management and airborne anti-submarine aircraft; network and tactical systems, including information and battle management systems; intelligence and security systems; missile defense systems; and space and intelligence systems, including satellites and commercial satellite launching vehicles. This segment consists of three capabilities-driven businesses: Boeing Military Aircraft, Network & Space Systems and Global Services & Support. The Boeing Military Aircraft segment is engaged in the research, development, production and modification of manned and unmanned military weapons systems for the global strike, mobility and surveillance and engagement markets, as well as related services. The Network & Space Systems segment is engaged in the research, development, production and modification of products and services to assist its customers in transforming their operations through network integration, information, intelligence and surveillance systems, communication, architectures and space exploration. The Global Services & Support segment is engaged in the operations, maintenance, training, upgrades and logistics support functions for military platforms and operations. The Boeing Capital Corporation segment facilitates, arranges structures and provides selective financing solutions for its commercial airplanes customers. In the space and defense markets, it primarily arranges and structures financing solutions for its Boeing Defense, Space & Security government customers. Its portfolio consists of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments. The company was founded by William Edward Boeing in 1916 and is headquartered in Chicago, IL.

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