Probably most of you know that Boeing (BA) is the world’s largest aerospace company and leading manufacturer of commercial jetliners and defense, space and security systems. You may not know that it is a dividend growth company too.
That second fact makes it of potential interest to dividend growth investors. Let’s examine the value in the stock’s price.
[ad#Google Adsense 336×280-IA]The process of valuation in stock investing, you will recall, suggests whether a stock is selling at a fair price, a bargain price, or an overvalued price.
For a variety of reasons, we like to buy stocks at no worse than fair prices.
If we can find one selling for a bargain price, that’s even better.
Boeing has raised its dividend for 5 straight years, making it a Dividend Challenger.
(Its full dividend history goes back into the 1930s.)
Boeing just raised its dividend by nearly 20% in March. It currently yields about 3.2%.
Boeing is A-rated for dividend safety by Safety Net Pro. Under their cash-flow-based method of analyzing dividend safety, BA’s dividend is considered to be extremely safe.
Let’s apply my 4-step process to see how whether Boeing is selling at a decent price. I average 4 different ways of estimating fair value, because there is no single precise method for determining fair value. Fair value peers into the future, which of course is impossible to know. So valuation is a process of assessment. I like to consult several methodologies.
Step 1: FASTGraphs Default Valuation
First we compare the stock’s current price to FASTGraphs’ default estimate of its fair value.
FASTGraphs’ default estimate is based on a price-to-earnings (P/E) ratio of 15. That is the long-term historical average for the whole stock market.
This fair value is shown by the orange line on the following graph, which traces Boeing’s earnings per share multiplied by 15. The black line is Boeing’s actual price. The thin lines are 10% increments above and below the orange fair-value line.
You can see that Boeing is trading just a bit higher than the first thin line above fair value.
To be specific, Boeing is trading at a P/E of 16.7. That is 16.7 / 15 = 1.11 = 11% above the orange fair-value line.
That suggests a fair price of $120 compared to Boeing’s actual price of about $133.
That’s overvalued in my book. But it is just the first of 4 ways that we will estimate Boeing’s fair value.
Step 2: FASTGraphs Normalized Valuation
Next, we compare Boeing’s current P/E ratio to its long-term average P/E ratio.
This lets us adjust for the fact that many stocks typically trade at valuations above or below the default P/E ratio of 15 that we used in the first step.
In my opinion, a stock’s long-term average P/E ratio reflects the sentiment that investors typically have about the company and its stock. Higher P/E ratios suggest more confidence (or more greed), and lower P/E ratios suggest less confidence (more fear).
As I usually do, I selected the 10-year average P/E to represent “normal” for Boeing. That ensures that I am including the Great Recession of 2007-2009 in the calculation as well as more normal years.
This changes the story. Boeing’s 10-year historical valuation has been 20.0 (shown by the dark blue line). In other words, it is a stock that the market typically likes or values more highly than the average stock.
Now the current price is more than 10% below the fair-value line. Specifically, Boeing’s P/E of 16.7, which looked overvalued in the first step, now looks undervalued when compared to the company’s long-term average P/E.
Specifically, the numbers are 16.7 / 20.0 = 0.84 = 16% undervalued. The fair value suggested by this method is about $160.
Step 3: Morningstar Star Rating
Now we try another approach. Morningstar uses a comprehensive net present value (NPV) technique for valuation. It involves discounting all of the stock’s future cash flows back to the present. When this technique is done right, many investors consider it to be the finest way to value a stock.
On Morningstar’s 5-star grading scale, 3 stars means that Morningstar believes that Boeing is fairly valued. They have computed a fair value price of $138, which is a few percentage points above Boeing’s actual price.
Step 4: Current Yield vs. Historical Yield
Finally, I like to compare the stock’s current yield to its historical yield. The higher the stock’s current yield is compared to its historical average, the better value it probably represents.
This display from Morningstar shows Boeing’s current yield compared to its 5-year average yield (see the last line).
Morningstar is showing Boeing’s current yield as 2.9% when it is actually 3.3% after the recent increase. Nevertheless, to be conservative, let’s use the 2.9% figure. In the last column, the 5-year average yield is shown as 2.2%. That suggests that the current yield is 32% higher than the 5-year average.
When I do yield comparisons, I generally cut off the differences at 20%, because this is the least precise method of the 4 that I use. So we will call Boeing 20% undervalued by this method. That suggests a fair value price of $175.
Valuation Summary
Now we put the 4 steps together and average them out.
I conclude that Boeing is about 10% undervalued at the present time. Its current price of about $133 is around 10% less than its fair value price of $148. I consider this an attractive entry point.
Note that this is not a recommendation to buy Boeing. Always perform your own due diligence on every potential stock purchase. Check out the company’s quality, financials, and business prospects. Also consider whether it fits into your portfolio and how it might help meet your long-term investing goals.
— Dave Van Knapp
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