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Boeing Shares: Cash Behind the Smoke

Dee Gill

It is a testament to investor faith in 787 Dreamliner maker Boeing (BA) that its share price has never been down more than a few percentage points this year, even though quite serious problems with this core product have kept the entire line grounded since Jan. 16. Now that the crisis looks set to pass, will the shares grow even more popular?

Boeing’s prospects improved markedly with a couple of events the week of April 1. The company successfully completed a critical test of the Dreamliner with no smoke in sight, indicating that it has fixed the battery problem that led to an emergency landing of one flight and smoke filling another parked plane. If the Federal Aviation Administration agrees (they had reps on board), the Dreamliner could resume commercial service by June, according to news reports.

Also last week, British Airways placed an order for 18 new Dreamliners. (Technically placed by International Airlines Group, parent company of the airline.) That $4 billion commitment was the best sign yet that the Dreamliner wasn’t permanently derailed by January’s international video of smoke-filled planes. British Airways already had 24 Dreamliners on order.

Boeing investors gave the company the benefit of the doubt all along. The share price was only mildly off even in the worst of the crisis. And, as seen in a stock chart, they bought like crazy when Boeing announced it had a fix for the problem.

BA Chart

Why such optimism? Investors appear to have concluded that Dreamliner’s problems will at worst delay profits, not necessarily lessen them long-term. And really, unless something happens to put profits permanently on hold, investors here aren’t particularly picky about the timing. The big thing Boeing investors care about is the cash, and how Boeing will share it.

Boeing announced a 10% dividend increase in December and plans to resume a $3.6 billion stock buyback plan. Many investors believe Boeing can still do much better for them later on, particularly as more and more payments for Dreamliners roll in. With a dividend yield of 2.3% now, the company just isn’t spending a lot on that.

BA Cash Div. Payout Ratio TTM Chart

For today’s value investors, the battery mess may be a bigger blessing that it might first appeared. While it didn’t drop the share price much, it cut share valuations more. Boeing’s forward PE ratio now is about 13.5, which is about as low as it has been since 2011. The shares trade at barely 11 times historic free cash flow.

BA Forward PE Ratio Chart

Dreamliner is critical for Boeing’s success as military orders decline. So, too, will be the upcoming roll-out of the 777X, an upgrade on a mini-jumbo jet. This version, like so many things Boeing makes, faces fierce competition from France’s Airbus. Last week, Reuters was publishing reports from industry sources that Airbus was on the verge of winning a $7 billion British Airways order in this category. It is fights like these, and the resulting publicity, that threaten Boeing’s share price as well as actual profits in the future.

The Dreamliner was a long time coming, and investors have been disappointed by delays of the rollout many times before. Sales were supposedly poised to finally crank up this year before the battery issues arose. What happens if they don’t now, or if the 777X faces a similarly slow launch? Perhaps patience will prevail again.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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