The Boeing Company (BA) has decided to return approximately 80% of cash from its free cash flow to its shareholders via dividends and share buybacks. This decision comes on the heels of the company’s expectation of lower research and development costs.
Lower research and development costs are a result of the company’s intention to accelerate the production of two of its planes — the 787 and the 737. This is based on the theory of economies of scale. Based on the theory, Boeing is getting the advantage of increasing scale and size, thereby reducing per unit cost. Also, increase in size improves operational efficiency thereby leading to lower variable cost.
The company has been working continuously to resolve the 787 battery issue and has also been successfully increasing production rates of its various programs. In the first quarter of 2013, Commercial Airplanes booked 209 net orders. Segment backlog remained strong with more than 4,400 airplanes valued at a record $324 billion.
Following nearly 4 months of suspension, Boeing recently resumed deliveries of its high-tech 787 Dreamliner jet. The company delivered a new Dreamliner airplane to All Nippon Airways Co., a unit of ANA Holdings Inc., marking the second year-to-date deliveries.
Boeing had last handed over a 787 to an airline company before Jan 16, 2013, when regulators halted all Dreamliners after two battery overheating incidents in that month. This incident compelled Boeing to ground all 50 Boeing 787 airplanes.
The company remains on-track to meet its goal of delivering more than 60 787s this year. Boeing has also boosted its production as it carried out the first 787 made at the new rate of 7 per month, up from 5 per month previously. It expects to increase the rate to 10 per month by 2013-end and will make the first delivery with this new rate by 2014.
The company has also increased the production rate for 737 from 35 to 38 airplanes per month in Mar 2013. It plans to increase this number to 42 airplanes per month in 2014. The company expects to make the first delivery of the 737 MAX in 2017.
Meanwhile, the company indicated that its move to deploy more cash will not reduce its cash balance of approximately $11 billion as it expects its operating cash flow before pension contributions to be utilized for the purpose. It expects cash flow to be more than 8 billion in 2013.
Of late, the company has been following a cash deployment strategy. In Dec 2012, Boeing raised its quarterly dividend by 10% to 48.5 cents per share from the previous payout of 44 cents per share. Boeing also announced the resumption of its stock buyback program with repurchases expected to total between $1.5 billion and $2.0 billion in 2013.
Boeing is the largest aircraft manufacturer in the world in terms of revenues, orders and deliveries, and one of the largest aerospace and defense contractors. While on one hand the efficiency of Boeing planes is increasing, on the other the production rate is increasing due to improvement in production methods.
However, a large percentage of Boeing’s business is generated within the U.S., and government sale that makes the company prone to budget deficits and political uncertainty. The company presently retains a Zacks Rank #3 (Hold).
However, stocks worth considering at present are Erickson Air-Crane Inc. (EAC), Wesco Aircraft Holdings, Inc. (WAIR) and Alliant Techsystems Inc. (ATK). While Erickson Air-Crane carries a Zacks Rank #1 (Strong Buy), Wesco Aircraft and Alliant Techsystems hold a Zacks Rank #2 (Buy).
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