Earlier this year The Boeing Company (NYSE:BA) reported a net income increase of 3 percent in the second quarter (relative to the second quarter 2011) largely thanks to strong commercial aircraft sales. CapitalCube analyzes the Earnings Quality for the company. Our analysis include comparisons of The Boeing Company (NYSE:BA) against its peer group — to check if the company is being more aggressive or conservative than its peers. Our peer set for Boeing Co. (BA) comprises: United Technologies Corporation (NYSE:UTX), Honeywell International Inc. (NYSE:HON), Lockheed Martin Corporation (NYSE:LMT), General Dynamics Corporation (NYSE:GD), Raytheon Company (NYSE:RTN), Northrop Grumman Corporation (NYSE:NOC), and Embraer SA (NYSE:ERJ).
If you missed our earlier reports on Boeing Co. (BA) this week you can find them on our blog: Fundamental Analysis, Corporate Actions, Dividend Quality.
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Accounting Quality
BA-US’s net income margin for the last twelve months is around peer median, which combined with relatively low accruals suggests a possible overstatement of its reported net income.
Management of Reserves
Boeing Co.’s accrual levels over the last twelve months are modestly positive but less than the peer median which suggests some amount of building in its reserves.
Material Categories
Excluding the effects of change in revenue, the accounting categories causing the most impact on the movement of net income from the prior period to the current period are Inventory, Pension Underfunded Amounts and SG&A.
Earnings: From Accounting or Cash Flow?
Net Income = Net Operating Cash Flow – “Accruals”
Accruals are estimates by company management of non-cash expenses, assets and liabilities that are recognized before they are paid. They are calculated as net operating cash flow less net income.
The analysis of accruals can help signal possible earnings management of reported net income and EPS results. For example, ‘Over-Accrued’ can signal under reported net income and/or the building of balance sheet reserve accounts, while ‘Under-Accrued’ can signal inflated Net Income results and/or release of balance sheet reserves to aid reported earnings.
Recent trend for BA-US’s accruals
The annual trend suggests that BA-US’s accruals to revenue ratio is less than (but within one standard deviation of) its four-year average accruals to revenue ratio of 2.3%. The increase in its accruals to revenue ratio to 0.0% from -0.6% (in 2010) was also accompanied by an increase in its peer median during this period to 2.1% from 1.3%.
On a quarterly basis, BA-US’s accruals to revenue ratio is less than (but within one standard deviation of) its four-quarter average accruals to revenue ratio of 1.9%. Though its accruals to revenue ratio has remained relatively stable at -0.3% compared to the previous quarter, its peer median has increased to 1.4% from -3.8% during this period. Relative to peers, accruals to revenue ratio fell 5.0 percentage points (and ended lower than its peer median).
Accounting Quality
Financials suggest possible overstatement of net income.
BA-US’s reported net income margin for the last twelve months is around the peer median (5.7% vs. peer median of 6.8%). However, the company has also recorded a relatively low level of accruals (1.0% vs. peer median of 2.7%) which suggests possible overstatement of its reported net income.
Management of Reserves
BA-US’s accounting suggests some amount of building in its reserves.
BA-US’s accruals over the last twelve months are around zero. However, this modestly positive level is also less than the peer median which suggests some amount of building of reserves.
Key Items Impacting Cash Flow
Other Income, Inventory and Intangible Assets have the most material impact on the movement of net income.
We assess the impact of various categories on the cash flow of the company by performing a variance analysis. For each category, this variance analysis measures the movement between the current and previous periods, normalized for the size of the company (e.g. days outstanding or percentage of revenues). This normalization eliminates any movement attributable to period-by-period growth and helps isolate the impact of any accounting policy changes the company might have made in recording the values in each category.
The chart on the right shows the impact of the top accounting categories on Boeing Co.’s cash flow for the current quarter. We consider both positive and negative impacts on the cash flow since the categories could have either decreased or increased the reported net income.
The table below details the impact of the major accounting categories on Boeing Co.’s net operating cash flow for the current quarter. While we have identified the major accrual categories, and conduct several tests on this standardized set, it should be noted that companies can sometimes have a non-standard accrual item that has a higher impact on the difference between net operating cash flow and net income.
| Item | Latest Quarter | Previous Quarter | Impact On Cash Flow (mn) | Impact On Cash Flow (%) |
|---|---|---|---|---|
| Accounts Receivable DSO | 29.8 | 29.7 | (19.7) | (2.2) |
| Inventory DSO | 154.1 | 152.5 | (353.9) | (39.0) |
| Accounts Payable DSO | 41.7 | 41.0 | 153.6 | 16.9 |
| PPE DSO | 42.9 | 43.9 | 230.2 | 25.4 |
| Intangible Assets DSO | 36.1 | 37.4 | 282.6 | 31.1 |
| R&D DSO | 3.9 | 3.9 | 4.8 | 0.5 |
| SG&A DSO | 8.0 | 8.4 | 87.5 | 9.6 |
| Tax Rate (%) | 33.1 | 36.8 | 218.0 | 24.0 |
| Restructuring Expense (% Revenue) | N/A | N/A | N/A | N/A |
| Other Income (% Revenue) | (79.1) | (83.0) | (794.2) | (87.5) |
Supporting Tests and Analytics
For further reference, we provide an extended analysis of the quality of accounting for each accrual category and the company’s results. We judge these results by comparing (i) against the company’s previous accounting policy — to ascertain if the policy has changed or (ii) against the peer group — to check if the company is being more aggressive or conservative than the peers or (iii) the appropriateness of the change and its implication.
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Today we analyze the Dividend Quality for The Boeing Company (NYSE:BA). CapitalCube scores the overall Dividend Quality for BA at 83. Our score is calculated based on the quality of the company’s current dividend, the trend in dividend quality over the last five years, and the existing dividend coverage (more here).
We compare The Boeing Company (NYSE:BA) to the following peers: United Technologies Corporation (NYSE:UTX), Honeywell International Inc. (NYSE:HON), Lockheed Martin Corporation (NYSE:LMT), General Dynamics Corporation (NYSE:GD), Raytheon Company (NYSE:RTN), Northrop Grumman Corporation (NYSE:NOC), and Embraer SA (NYSE:ERJ).
Earlier this week we published Clipping the wings on the 777: Boeing Co. (BA) Fundamental Analysis and Boeing Co. (BA): Dividend Increase?.
Dividend Quality
High Quality
Over the last twelve months (prior to 2012-06-30), BA-US paid a high quality dividend, which represents a yield of 2.5% at the current price.
Dividend Quality Trend
Dividend quality trend has not been consistent over the last five years. Dividends were paid during each of these years — of these 3 were high quality and 2 were low quality.
Dividend Coverage
Strong
The ending cash balance, with a dividend coverage of 8.0x, provides a substantial cushion in case of a significant reduction of cash flows in the future.
Dividend Yield and Payout
Cash flow coverage of the dividend paid is more relevant than dividend payout.
While traditional dividend analysis focuses on dividend payout from net income, we focus on the cash flow coverage of dividends (paid to the common stock) in order to determine their quality and sustainability. We assess whether dividends are being paid from operating, investing and issuance cash flows or whether the beginning cash balance is needed to make this payment. We make the assumption that cash dividends are paid only after net debt repayments. We consider the cash outflow from share buybacks to be discretionary and thus ignore its impact on cash required to support the dividend policy.
Dividends that are fully covered from operating and investing cash flow net of any cash outflow from debt repayments and net of a decrease in deposits (for banks) are considered to be “high quality”. Those that require an additional net cash inflow from issuance are categorized as “medium quality”. If operating, investing and issuance cash flows are not sufficient to fund the dividend and the beginning cash balance is used, the dividend is referred to as “low quality”.
This last category is most at risk of a dividend cut though we recognize that companies that have a large cash balance could continue to pay dividends even with a “low quality” dividend profile. For all these definitions, we assume the cash outlay for share buybacks is discretionary and can instead be used to support dividends.
BA-US’s dividend payout is similar to the peer median.
All 7 peers for the company are dividend paying stocks. Over the last twelve months (prior to 2012-06-30), BA-US’s dividend payout of 29.7% and the corresponding dividend yield of 2.5% (relative to the current price) compare to a peer median level of 32.7% and 2.7% respectively. Relative to its peers, the firm is generating a median dividend yield with a median dividend payout, which suggests a proper dividend level based on this traditional analysis.
Dividend Coverage
Over the last twelve months (prior to 2012-06-30), BA-US paid a high quality dividend.
The source of the company’s cash to support the dividend paid over the last twelve months is operating cash flow (coverage of 4.0x), investing cash flow (coverage of -1.5x), issuance cash flow (coverage of -0.4x) and twelve-month prior cash (coverage of 6.9x), for a total dividend coverage of 9.0x. BA-US’s issuance cash flow includes outflows from net debt repayment (coverage of -0.4x).
These coverage ratio factors imply that the firm’s dividends are wholly paid from operating and investing cash flows net of any debt repayments, which suggests a high dividend quality. BA-US’s dividend quality is in line with a majority of its peers, which comprise 6 high quality and 1 medium quality.
Dividend quality varied between high and low over the last five years.
BA-US has paid a dividend in each of its last five years. The distribution of dividend quality over this period consists of 3 high and 2 low. In particular, the dividend paid in 2011 was of high quality, compared to a low quality dividend in the prior year.
BA-US’s dividend has a strong cushion from the ending cash balance.
While the dividend yield is similar to the peer median, it is of high quality in this period. Assuming the cash dividend paid remains constant, the high quality coverage would need to deteriorate by 51% before cash from issuance is needed to fund the dividend payment.
Thus, the level of deterioration in operating performance would have to be quite severe suggesting that the current dividend quality is relatively robust. The ending cash balance, with a dividend coverage of 8.0x, provides a substantial cushion in case of a significant reduction of cash flows in the future.
