Dividend Farming Scorecard: Aerospace Comparison (UTX, GD, BA)

As a fan of the aerospace field I’ve looked at three of the major players in the industry since January.  Below are side-by-side comparisons of United Technologies (UTX), General Dynamics (GD), and Boeing Company (BA).

Charts like this are handy methods for sifting through multiple options quickly to filter the true opportunities from those that just won’t fly.  Although each has issues that may prevent a Dividend Farmer like me from investing, only BA is totally off the table.

FACTOR	TARGET METRICS	UNITED TECHNOLOGIES	GENERAL DYNAMICS	BOEING COMPANY
CCC List	Champion	Champion	Champion	Challenger
Current Yield	4.0%	2.45%	2.4%	2.20%
Company Profile	Red Flags	Treasury Stock?	Aerospace and Defense	Recent crashes.
Industry Leadership	Top 10	#3	#4	#1
Market Cap	$10 B+	$99.9 B+	$42.7 B	$211.2 B
P/E	< 20	17.8	15.4	20.9
P/B	< 2	2.5	3.6	626
Debt / Equity	< 1	1.1*	2.1	345
Dividend History	25 Years	25	27	8
12 Month Price Range	Lower Half	Top 10%	Bottom Quartile	Upper Half
Dividend Payout Ratio	< 75%	44%	35.30%	38.30%
Portfolio Weight	Slightly Over	Under	Under	Under
DATES		1.25.19	1.06.19	3.27.19

It’s possible an investor may look beyond the first three items.  For instance, an aggressive dividend growth trend coupled with a low payout ratio might shore up the low yield within a year or two.  Recent crashes are in receding in the rearview mirror and will be forgotten by Mr. Market before you can say ‘cleared for departure’. 

However, once a value investor gets to the Price-to-Book and Debt-to-Equity figures relative to UTX or GD, the game’s over.  Those figures aren’t going to correct to an acceptable level in the foreseeable future – if ever.

Although barriers to entry are high, which is good as far as investors are concerned, the aerospace segment carries inherent risk given the cyclical nature of the airline industry.  Add to this the potential for news-making catastrophes driving Mr. Market into an uncontrolled spin and there’s no need to add more risk with value metrics as far off the market as BA’s.  The upside isn’t there.

Analysis  

As mentioned in the original Boeing Scorecard, the recent 737 Max crashes may result in a buying opportunity for momentum investors or frequent traders looking to ride a wave for short-term gains.  I’m looking for something to hold for the long haul that provides an adequate return while minimizing risk to an acceptable level.  UTX and GD in that order are still investment options for the farm.  This is particularly true given the lack of aerospace or manufacturing in my portfolio.  As much as I admire Boeing’s products and history, this Dividend Farmer won’t be buying an BA.   

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

Dividend Farming Scorecard: Boeing Company (BA)

Although I’m a Dividend Farmer I’m also an aerospace enthusiast and pilot.  Boeing’s been in the news recently, for all the wrong reasons, but it’s an interesting company to me so I thought I’d take a look at it while it may be under duress.

The table below provides a summary of factors I’m scoring for BA as of March 27, 2019.  Laying out my analysis like this helps me quickly benchmark an opportunity against target metrics.  It also allows me to quickly compare this firm to alternatives as part of my screening process.

FACTOR	METRICS	BOEING COMPANY
CCC List	Champion	Challenger
Current Yield	4.0%	2.2%
Company Profile	Red Flags?	Aerospace & Defense Recent crashes.
Industry Leadership	Top 10	1st
Market Cap	$10 B+	$211.2 B
P/E	< 20	20.9
P/B	< 2	626
Debt / Equity	< 1	345
Dividend History (Years)	25	8
12 Month Price Range	Lower Half	Upper Half (barely)
Dividend Payout Ratio	< 75%	38.3%
Portfolio Weight	Slightly Over	Under

CCC List: The DRIPinvesting.org web site provides the list of Champions, Contenders, and Challengers where I normally start.  Boeing Company has a fairly short record as a Dividend grower – only 8 years - which doesn’t present much of a launch. 

Current Yield:  BA’s yield is 2.2% as of this writing, but historically runs under 2%.  It’s currently paying over $8 a share in dividends but with a share price of nearly $375 it stands well outside my price range.  At that level, BA would have to pay an annual dividend of nearly $15 to approach my 4% target yield.

Company Profile:  BA is one of the Big 2 manufacturers (with Airbus) of wide body commercial aircraft and a leading aerospace and defense firm involved in U.S. Air Force aircraft production to space launch activities.  Barriers to entry in this space are high, but so is the cost of doing business – even for the established.

Industry Leadership:  Skift.com ran a Bloomberg article in January 2019 indicating Boeing was the world leader in commercial aircraft production.  BA was also the largest of the aerospace and defense firms found on the 2018 Fortune 500 list.  Being #1 has its advantages but I’m not taking that position for granted.

Market Capitalization:  At $211 billion and change, market cap size is without question.  A good sign on this Scorecard for BA.

Price to Earnings:  The trailing P/E at just over 20 is about a thread’s width outside my range.  It’s close enough for that metric to be anything but a show stopper.  However, other metrics must show well.

Price to Book:  The P/B ratio of 626 with a book value per share listed at $0.60 according to Yahoo Finance puts this issue to rest.  At no point in a value investor’s career could an investment at that level be warranted.  Not while sober and conscious. 

Debt to Equity:  Debt is 345 times the equity.  Although unlikely, should BA ever fold I would be fortunate to get a couple aircraft rivets in return.

Dividend History:  A dividend growth history of 8 years is better than nothing, but not better than a lot of alternatives with superior metrics.  BA’s grown its dividend aggressively over the past 3 to 5 years, but that’s not enough for this Dividend Farmer.

Price Range:  The price is nearly in the center of its trailing 12-month range - $65 below its top end and roughly $70 above its low for the year.  Considering the fallout from the two 737 Max crashes, an Air Force contract snafu, and a Southwest engine incident recently, its position nearly midway between the high and low points strikes me as amazing.  The decline is roughly 15% but I would have assumed the loss to be greater given setbacks with its 737 series which is the longest selling, highest volume commercial aircraft in the world.

Payout Ratio:  The payout ratio at 38.3% is solid.  It leaves a lot of room to grow, but at current rates it would take several years to reach the appropriate yield range.  Alternatively the price would have to be beaten down further still, which is unlikely.

Portfolio Distribution:  BA would be my only aerospace holding.  I’d love to have an aviation blue blood within the portfolio, but won’t put one there unless the scorecard is solid – or the price is extremely attractive and I have money I don’t mind losing.  Also unlikely.

Analysis  

BA missed on over half my benchmarks.  It wasn’t within Saturn V range of P/B or D/E and out of bounds on four others with short-term red flags prominent.  UTX and GD would be superior opportunities.  Although Boeing is likely to rebound from its current problems and provide a nice price run for those jumping in now, a Dividend Farmer isn’t looking for appreciation without a solid dividend and healthy financials.  BA doesn’t provide that.   

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

Dividend Farming Scorecard: NACCO Industries (NC)

Earlier this month I summarized Top 10 Dividend Champions that ranked among the ten best in multiple investment metrics.  NACCO Industries was among the Top 10 firms in three different categories: Price-to-Earnings, Price-to-Book, and low Payout Ratio.  I thought it would be a good exercise to see how NC performed across the board.

The table below provides a summary of factors I consider as applied to NACCO Industries on March 17, 2019.  Laying out my analysis like this helps me quickly benchmark against my target metrics and compare this firm to alternatives.

FACTOR	METRICS	COMPANY
CCC List	Champion	Champion
Current Yield	4.0%	1.8%
Company Profile	Red Flags?	Primarily coal mining and related services
Industry Leadership	Top 10	7th
Market Cap	$10 B+	$267 M
P/E	< 20	7.6
P/B	< 2	1.05
Debt / Equity	< 1	.33%
Dividend History (Years)	25	33
12 Month Price Range	Lower Half	Top 20%
Dividend Payout Ratio	< 75%	13.2%
Portfolio Weight	Slightly Over	Under

CCC List: The DRIPinvesting.org web site provides the list of Champions, Contenders, and Challengers which is where I normally start.  NACCO industries has a substantial record as a Dividend Champion which bodes well out of the gate. 

Current Yield:  NC’s yield is 1.8%, less than half my target, paying $0.66 annually.

Company Profile:  NACCO is a mining company specializing in production of bituminous and lignite coal for power generation.  Power generation requirements won’t disappear in the foreseeable future.  However, I’m not as sure about fossil fuels that supply it e.g., coal.  While barriers to entry are high for competitors, I’m not sure the future for coal producers is sunny.

Industry Leadership:  The U.S. Energy Information Administration lists NACCO as the 7^th largest coal producer in the U.S.  That’s a nice stat but it must be paired with market capitalization and other factors to gain a clear picture.

Market Capitalization:  With a grand total of $267 million, the market cap for NACCO falls far below the desired minimum.  The size of the firm makes a number 7 ranking within the industry dubious.

Price to Earnings:  The trailing P/E of 7.6 is among the best I’ve seen in several months. Daily volumes are light and the firm small which may explain as much about the low P/E as would the firm’s business operations.

Price to Book:  P/B at $1.05 for every $1.00 purchased.  There’s no good will on the books and little in the way of intangible assets.  If the firm was liquidated, I would get back most of my money in which case the risk appears low.

Debt to Equity:  Debt is roughly a third of all assets owned so that’s a definite plus.

Dividend History:  A dividend growth history spanning 33 years is sound.  Better yet, the dividend growth rate over the past 10 years has been in the solid double-digit range.

Price Range:  The price is within 20% of its high during the trailing 12-month period.  I wouldn’t call it a bargain based on the range alone, but its volatility is such that it may be possible to buy into a position on a future dip.

Payout Ratio:  The payout ratio at just over 13% is about as low as a dividend payer may get.  There is plenty of room to run up that ratio and it appears NACCO has been working on doing that over the past 1 to 3 years.  However, the cash flow appears cyclical in which case I wonder how long an aggressive div growth practice may continue.

Portfolio Distribution:  NC would be my only coal producer if I were to add it to the farm. Energy is a great sector, but I question whether coal production is the best play.

Analysis  

NC misses on only 3 of my primary benchmarks.  At first blush, the opportunity looks sound, particularly considering the important financial ratios.  However, the size of the firm, health of the industry, and political climate in vogue leads me to believe NC wouldn’t be as sound a long-term investment as downstream energy plays in the sectors of generation or distribution.  Given the number of substitute fuels available for electricity generation, parking cash in a coal producer for the next 10 to 15 years isn’t a fit for this Dividend Farmer.   

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.