Image Source: Simon Cunningham
Let’s take a quick look at the fourth quarter earnings reports of a few wide-ranging, big-name dividend payers, all of which are leaders in their respective industries. Included in this article: Boeing, McDonald’s, and AT&T.
By Kris Rosemann
Boeing Reports Record Fourth Quarter Results
Shares of aerospace giant and former simulated Dividend Growth Newsletter Portfolio idea Boeing (BA) rallied following its fourth quarter report, released January 30, as it turned in record fourth quarter marks for revenue, operating profit, and GAAP earnings per share. Revenue in the period advanced 14% on a year-over-year basis thanks to record commercial aerospace deliveries and higher defense and services volumes. Its ‘Commercial Airplanes’ segment led the way in terms of operating margin expansion, which grew 270 basis points from the year-ago period on a GAAP, consolidated basis, and earnings from operations leapt 40% from the fourth quarter of 2017. The company’s total backlog sat at an incredible $490 billion at the end of 2018, up from ~$475 billion one year earlier and nearly five times its annual revenue in 2018.
Boeing continues to generate impressive levels of free cash flow, and cash flow from operations advanced roughly 15% in 2018 on a year-over-year basis, driving free cash flow higher by ~17% to $13.6 billion. Cash dividends paid in the year came in at just over $3.9 billion, and the company repurchased $9 billion of its own shares in 2018. Boeing’s net debt position grew slightly in 2018 to nearly $5.3 billion (~$13.8 billion in total debt versus ~$8.6 billion in cash) due in part to the acquisition of aerospace parts and services provider KLX Aerospace Solutions, which is part of its strategy to enhance its position in the massive aerospace services market. At last check, the company had an impressive Dividend Cushion ratio of 2.2 thanks to its robust free cash flow generating capacity, and shares yield ~2.1% as of this writing.
Boeing’s massive backlog of unfulfilled orders continues to help drive a solid outlook, and 2019 is no exception. It expects revenue in a range of $109.5-$111.5 billion (was $101 billion in 2018), core earnings per share in a range of $19.90-$20.10 (was $16.01 in 2018), and operating cash flow in a range of $17-$17.5 billion (was $15.3 billion in 2018). Our fair value estimate for Boeing currently sits at $330 per share, but the upper half of our fair value range, which tops out at $404 per share, may be more appropriate given this strong near-term guidance. Nevertheless, shares are pushing the $390 mark, and we’re not particularly interested in adding exposure at these levels. The company appears to have put its recent margin concerns behind it, but we’re still comfortable watching the aerospace giant from the sidelines.
McDonald’s Comps Impress; Long-Term Targets Solid
McDonald’s (MCD) turned in its fourteenth consecutive quarter of positive global comparable sales in its fourth quarter report January 30, and 2018 marked a second consecutive year of growth in its global guest count for the first time since 2012. In the fourth quarter, global comparable sales advanced 4.4% from the year-ago period with positive comps across all segments, but its franchising efforts led to consolidated revenues falling 3% from the year-ago period on an as-reported basis. Operating income declined 7% from the fourth quarter of 2017 due in large part to non-cash impairment charges, and diluted earnings per share came in at $1.82, more than double the measure in the year-ago period.
Cash flow from operations at McDonald’s in the full year 2018 advanced an impressive ~25%, which helped free cash flow grow by 14%+ to $4.2 billion as capital spending rose materially in the year. Cash dividends paid in 2018 came in at nearly $3.3 billion, and the company repurchased ~$5.2 billion of its own shares. At the end of 2018, the company held $866 million in cash and equivalents and nearly $31.1 billion in long-term debt, and this debt load provides material pressure to its Dividend Cushion ratio, which sat at 0.4 at last check. Shares yield ~2.55% as of this writing.
Now that it has largely completed its franchising strategy, McDonald’s is expecting annual systemwide sales of 3%-5% over the long haul, annual earnings per share growth rates in the high-single-digits, and return on invested capital in the mid-20% range. These are attractive targets but are roughly in-line with our mid-cycle assumptions that drive our fair value estimate of $145 per share for the company. We’re not interested in shares of McDonald’s due to its rich valuation — shares are trading near the upper bound of our fair value range — and we prefer companies with far less debt for long-term dividend growth considerations, even as we applaud management for some of its recent strategic moves in refreshing the image of the iconic American brand in the minds of investors.
AT&T’s Top-Line Grows; Wireless Subscriber Additions Miss Estimates
Next-generation media giant AT&T (T) faced some selling pressure following its fourth quarter report, results released January 30, despite consolidated revenues advancing 15.2% on a year-over-year basis. The acquisition of Time Warner was partially offset by the impact of the new ASC 606 revenue recognition standard, and declines in its legacy wireline service, wireless equipment, domestic video, and Vrio (DirecTV in Latin America) were overcome by growth in domestic wireless services and Xandr (its new advertising platform) and the impact of WarnerMedia. Management noted solid growth in operating income thanks to the acquisition of Time Warner and the write-off of certain network assets in the comparable period of 2017, and its adjusted operating margin expanded to 19.6% from 15.1%. Adjusted earnings per share, which was altered for a number of asset sales and merger-related items, advanced to $0.86 in the fourth quarter of 2018 from $0.78 in the year-ago period.
AT&T’s reputation as a tremendous free cash flow generator was solidified in 2018 as it turned in cash flow from operations of $43.6 billion, 15% higher than that of 2017, and free cash flow jumped nearly 36% to ~$22.4 billion. Cash dividends paid in the year came in at $13.4 billion, suggesting significant coverage of the dividend with internally generated cash flow, but its Dividend Cushion ratio is a paltry -0.2 at last check due to its massive debt load. Management remains focused on deleveraging, and it has lowered its net debt load to ~$171 billion as of the end of 2018 from $180 billion at the time of the closing of the Time Warner merger. Its net debt-to-adjusted EBITDA ratio sits at 2.8x, and shares yield ~6.9% as of this writing.
AT&T expects to continue its robust free cash flow generation in 2019, with guidance for the measure coming in at ~$26 billion for the year. Adjusted earnings per share growth is expected to be in the low-single-digits, which the company expects to result in a dividend payout ratio in the high-50% range. Capital spending is expected to continue growing in the year as well as it works to achieve its goals of winning in all facets of the next-generation media space, and management is targeting a net debt-to-adjusted EBITDA ratio of 2.5x at the end of 2019. Our fair value estimate for shares currently sits at $38 each.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.