From 2001 through 2003, Boeing’s dividend froze at an annual rate of $0.68 per share. From 2007 through 2012, Boeing’s dividend only grew by 3% annually and included a freeze of $1.68 per share from 2009 through 2011. Today, Boeing’s Board of Directors decided to reward shareholders with an eye-popping 30% dividend raise.
I mention the former context because these 30% days are not here to last. Sure, you might see big hikes in 2017, 2018, and even 2019, but Boeing’s business model reminds me of the Warren Buffett quip: “I’d rather have a bumpy 15% return than a smooth 10% return.” A typical decade for a Boeing shareholder will go something like this: 2-3 years of dividend freezes, 2-3 years of low dividend growth, 2-3 years of moderate dividend growth, and 2-3 years of crazy high dividend growth.
There has been a bizarre trend on income investing websites where writers talk about “putting a stock on probation” or selling it outright when there is a dividend freeze or a few years of anemic dividend growth.
That is not the right attitude to have towards a cyclical stock like Boeing. The premise of the ownership position is that the good years will be really great, and the bad years will remain profitable but will see earnings get cut in half.
For people willing to tolerate the stock price volatility, earnings volatility, and bumpy dividend growth, Boeing ownership is worth the years of seeming adversity. It has a twenty-five year track record of 14% annual returns and 12% annual dividend growth.
But I see people on message boards fist-pumping each other about the 30% dividend hike. It is fine to get excited about a big hike like this, so long as you recognize the ephemerality of it. I would wager that at least two years out of the next ten will see Boeing shareholders receive a dividend hike of 3% or lower. That’s not a shot at the company, but a recognition that its business model has historically been cyclical and remains cyclical. People are talking about the Republican administration and the Iran deal now, but a day of defense sanctions for countries X, Y, and Z as well as defense spending sequesters is always in the offing.
I have received e-mails from people who eagerly purchased BP stock in the $40s for the dividend and then sold it in the low $30s when earnings fell and uncertainty about future dividend projections arose. I don’t like that mentality. When you buy cyclicals, you have got to go all in on the concept. There will be years that drive you crazy, and then there will be years that rain down riches upon you. The sum of the experience is usually 11-12% returns, and the volatility is your payment for beating the market by a point or two.
Aside from these anecdotes, it is also my natural temperament to heed Socrates’ call that “there is nothing stable in human affairs. Therefore, avoid undue elation in prosperity and undue depression in adversity.” Boeing has great technological sophistication and operates in an industry with enduring demand. The 30% dividend raise is a great reward for patient long-term shareholders. But any excitement over this big hike must be calibrated to recognize that the ten-year picture will include years of negligible dividend growth and this year’s increase amounts to a thrice in a generation event.