Not long ago we wrote about whether or not Boeing would need to outsource production in order to remain profitable. That question largely had to do with the threat of a long-term trade war and Boeing potentially losing markets as a result. The trade war may well be on its way to at least a temporary resolution so the question is why invest in Boeing over the long term? Essentially Boeing is a cash cow with a dominant position in an increasingly higher and higher cost of entry business. Its only real competitor is Airbus as the two of them control more than 85% of the commercial aviation market.
Boeing
Boeing was founded by William Boeing in 1916 as Pacific Aero Products Co. He changed the name to The Boeing Company two years later. In 1997 Boeing merged with McDonnell Douglas in 1997. Boeing is the largest US exporter by dollar amount. The company ranks number five in the world as a defense contractor. Boeing manufactures and sells airplanes, rockets, satellites, and helicopters of its own design. It also leases products and provides lifetime product support to everything that it sells.
High Cost of Entry Business
Why invest in Boeing? Our first reason is that they are in a high cost of entry business. They deal in state of the art, high technology, and produce very expensive products, which they are able to routinely sell at handsome, profits for years and even decades. The amounts money needed to compete in this arena are huge, the skill sets needed take decades to develop, and the base technologies are closely held.
State of the Art Jets
The most recent major addition to Boeing’s fleet of jets is the 787 Dreamliner. This wide-body, long haul, mid-sized jet is roughly a fifth more fuel-efficient than its predecessors and competitors. Built with composite materials, the plane is lighter and cheaper to operate than other jets of comparable size and range.
Its noise-reducing features are state of the art as are it mostly electrical flight systems. The jet entered testing in 2009 and finished testing in 2011. Boeing spent roughly $32 Billion developing this jet.
Not only did Boeing spend $32 Billion in development, but also it took just over 10 years from concept to a flying and sellable jet. Now the 787 is a mainstay in the commercial aviation market and Boeing is looking to develop the next start-of-the-art commercial jet. The only other company with comparable resources is Airbus.
Missiles and Satellites
Going back to the Minuteman missiles in silos across the wheat fields of North Dakota and grasslands of Montana to the current partnership with Lockheed Martin in the United Launch Alliance, Boeing has been in the rocket business. They still maintain missiles for the US nuclear deterrent and run the United Launch Alliance with Lockheed Martin. They maintained the Space Shuttles when that program was still running. This is again, a high cost of entry business that takes huge amounts of resources, state of the art technological skills, and the capacity to guard what are essentially state secrets forever.
Boeing does this work and does it at a profit as part of its Defense, Space, and Security division. This company is one of the mainstays of US military readiness and able to make a steady profit year in and year out.
Why Invest in Boeing?
As we so often come back to on these pages, long term successful investing depends on the analysis of intrinsic stock value and Boeing has this is spades! The company routinely makes money. This ability starts with the ability to turn new technology into marketable products. But, it is more with Boeing because they have such a wide range of skills and virtually control the commercial jet business along with Airbus. When they have to, they share little and inconsequential parts of their knowledge base to do offshore fabrication to maintain customer bases. Then they do all design, critical manufacturing, and assembly in the USA.
Adding Boeing to Your Portfolio
The Motley Fool writes about 3 Stocks to Build Your Portfolio Around. The first on their list is Boeing.
If you’re looking for one stock to build your portfolio around, one great company you can count on to hold its value over time while paying you a steady dividend, I can’t think of a better place to start than Boeing.
In business for more than a century, Boeing clearly has staying power. This company isn’t going to disappear until someone invents a better way to move quickly over long distances across large bodies of land and water. And while Boeing doesn’t have a monopoly on building planes, it arguably has the next best thing: an oligopoly between it and its rival Airbus, which between them account for roughly 88% of all commercial aircraft revenue.
With $13.6 billion in annual free cash flow to back up its $10.5 billion in reported earnings, you know that Boeing’s earnings are of exceedingly high quality, and more than sufficient to cover the dividend. Boeing’s payout ratio, in fact, is a very low 38%, meaning that only 38% of earnings suffice to pay the entire dividend.
Boeing has been paying dividends for decades and has been steadily increasing their dividend for the last seven years.
Boeing is a major player in commercial aviation and in the defense industry. This allows it to use technologies and skill sets developed in one arena and apply them to another. They are also important to the US economy as the exporter who rivals all of US agriculture in how much money they bring back to the USA. Although Boeing has substantial cash reserves, they do not have a large hoard of cash offshore.
There are certainly companies that have grown faster, but as the folks at The Motley Fool note, until someone invents a new technology for moving people and cargo quickly from one continent to another, Boeing will have customers. And, as higher technical skills make that job more efficient and profitable, Boeing will remain at the head of the line.
another, Boeing will have customers. And, as higher technical skills make that job more efficient and profitable, Boeing will remain at the head of the line.