In the eight years that followed, Boeing achieved record deliveries and free cashflow grew consistently year over year. Investors benefitted from both annual dividends and share buybacks on top of share price appreciation.

From 2013 to 2018, Boeing shares rose by 160% from $135 to $350. 

Unfortunately, shortcuts taken by management lead to the famous Manoeuvering Characteristics Augmentation System (MCAS) issue resulting in two fatal 737 crashes in 2018/19. Boeing agreed to a settlement of $2.5bn for the airlines and victims’ families. Today Boeing faces different issues particularly supply chain restrictions and recertification of the 737 Max-10.

Boeing CEO David Calhoun told Aviation Week magazine that if the aircraft fails to meet the end-of-year deadline and congress doesn’t extend the 737 Max-10 exemption for installing the pilot warning system, he may cancel the programme. Such an event would be disastrous for Boeing, leading to significant asset write-downs, order book cancellations and customers moving to the likes of Airbus.

Turning point

The string of disappointing news over the last few years has left Boeing shares trading way below the $200 mark. Despite the current headwinds, Boeing’s 737 Max still has a lower fuel consumption in comparison to Airbus’s A320neo (according to Boeing) and the programme still has a 3,400+ order book.

In the event of a recession the backlog is unlikely to be entirely depleted, as production rates would need to exceed 2018 levels (800+ deliveries), which is not a realistic possibility. During the second quarter earnings call this week, management confirmed that they’re in the final stages of restarting 787 deliveries.

With this positive news, there are two key turning points I am focusing on:

1. Recertification of 737 Max-10 or congress extending exemption;
2. Supply chain issues abating.

Supply issues appear to be improving already as Boeing’s Q2 delivery numbers increased to 121 — of that number 103 were 737 aircraft. Only 86 737 aircraft were delivered in Q1.

Furthermore, airlines continue to place new orders with Boeing despite supply issues and certification uncertainty. If Boeing is successful in certifying 737 Max-10 before year end, the stock could easily exceed the $200 mark as free cashflow would be anticipated to recover to pre-pandemic levels ($12-13bn) in the coming years.

At the current valuation of $85bn ($156 per share), Boeing has room for share-price appreciation as free cashflow is estimated to reach $12bn by FY24 according to Wall Street. This would imply a two-year forward market cap/free cashflow (MC/FCF) of 7x. Historically Boeing usually trades at 18x MC/FCF — in other words, the stock is cheap.

Conclusion

It can be argued Boeing is approaching a turning point in the coming quarters potentially making Boeing a buy for me at $156. Demand is strong as the total order book value of the commercial airline business is $290bn with an additional $60bn in defence contracts waiting to be fulfilled. Two board members have purchased noticeable volumes of shares in the last six months demonstrating a vote of confidence.

I’ve added Boeing shares to my watchlist as I patiently wait on operational developments and investor updates, mainly what is happening with the 737 Max-10.

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George Theodosi has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Growing a passive income portfolio has several benefits, including valuation support in times of economic slowdown, income stability and the opportunity to reinvest dividends.

When a dividend-paying company sees its shares (and valuation) trend lower while maintaining its dividend, thereby increasing the yield, the market is anticipating a dividend cut at some point in the future. 

This is precisely what is happening with Barratt Developments (LSE:BDEV). However, I believe the dividend is unlikely to be paused — and if it is cut in the future, I do not believe it is likely to go below 4% (it’s currently 6.4%).

Why is the market pricing in a dividend cut?

Homebuilder profits are directly tied to home prices, production volume and building costs such as labour and raw materials that determine profitability. Home prices are driven by:

1. Demand – mortgage rates (currently at 4.38%), average incomes and population growth.
2. Supply – volume of new homes being built. 

Mortgage rates are likely to be much higher in 2023 than in 2021 or 2020, which is expected to cause a correction in UK house prices because a decrease is required to maintain payment affordability for home buyers.

Lower house prices will result in lower future profits for homebuilders like Barratt Developments, but this entirely depends on the rate of decrease in average house prices.

Despite negative sentiment towards homebuilders, the UK is still suffering from an undersupply of new homes as the target of building 300k (as per the Conversative party manifesto) new homes is far from being met.

Net new dwellings in 2021 was below pre-pandemic levels — according to the Department for Levelling Up, Housing and Communities — at around 220k. 2022/23 figures are expected to be higher, but they do not appear to be on target to reach 300k by the middle 2020s according to industry specialists.

Therefore, I would argue house prices will see some level of price support in a correction, unlike in the 2008 financial crisis. Furthermore, analyst estimates suggest a growing dividend over the coming years with annual distributions of 39p (FY22), 45p (FY23) and 51p (FY25).

Even if these estimates are reduced by 40% as a result of margin pressure and lower house prices, the dividend yield would still be relatively attractive at over 4% (18p+) given Barratt Developments’ investment-grade balance sheet and long-term potential.

Balance sheet built for recession 

As of 31/12/2021, Barratt Developments had over £1.33bn in cash and cash equivalents, meaning the £300m paid in dividends last year could easily be maintained. Barratt Developments comfortably covers its LT debt of £208m, thereby significantly reducing bankruptcy risk.

One area of weakness on the balance sheet is inventory, which is marked at £4.9bn. In a housing correction the value of this inventory could easily be marked down, resulting in additional losses or a more severe dividend cut.

Conclusion

Overall, I believe the market has already significantly de-risked Barratt Developments’ market capitalisation, making today’s valuation of £4.6bn attractive enough to open a small position.

I agree the current economic situation is likely to negatively impact UK house prices over the coming quarters, which is likely to result in earnings revisions and lower price targets.

Therefore I have only opened a small position, with the idea of averaging down as negative news and recession data mounts over the coming 12 months.

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George Theodosi has a position in Barratt Developments. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

When looking for growing dividend stocks, it’s important that the companies operate in a stable industry and have clear guidance for investors.

Over the last 12 months, the FTSE 100 has outperformed the S&P 500 (-2%) Russel 2000 (-18%), Nasdaq 100 (-7.7%), Dow Jones Industrial Average (-4.7%) and the Wilshire 5000 (-6.7%).

A key reason for this outperformance is due to the stable earnings of the top FTSE 100 constituents, which tend to be mature cashflow rich businesses, unlike in the US, where the top S&P 500 constituents are valued based on their growth potential rather than current earnings.

Below are two top FTSE 100 stocks I’ve increased my position in recently because of their long history of capital returns and stable growth expectations.

A healthcare dividend stock

Last year GlaxoSmithKline (LSE: GSK) announced it would cut its dividend and spin off its consumer healthcare business under its own exchange listing.

By separating the consumer health business, the two separate entities (GlaxoSmithKline /Haleon) can refocus on their core operations and individual long-term goals.  

By investing in GlaxoSmithKline I’m gaining exposure to its consumer healthcare segment, which owns popular brands such as Sensodyne, Panadol, Advil, Voltaren, Theraflu and Otrivin. These products are less sensitive to an economic slowdown as healthcare products like toothpaste or pain relievers are treated as a necessity by consumers.

I also benefit from GSK refocusing on its speciality medicines, vaccine and general drugs business, which is expected to grow by more than 5% annually over the next decade.

The separation will include a dividend cut, from 80p per year down to 55p per year (44p from GlaxoSmithKline and 11p from Haleon). This implies a dividend yield decrease from 4.6% down to 3.17%.

Since GlaxoSmithKline announced the dividend cut and separation last year, its shares have rallied 28%. This is because the dividend today is not as important as the estimated earnings growth communicated by management, which will then lead to higher dividends in the future.

This stock has a 6.2% dividend

In recent years, valuations for tobacco companies have lagged behind stock market indexes due to ESG concerns. However, dividend payments have increased year over year from companies like British American Tobacco (LSE:BATS).

For me, investing in British American Tobacco is not a play on the long-term growth of tobacco consumption but rather a play on capturing aggressive capital returns as management buyback shares and distribute dividends.

Over the last four quarters, British American Tobacco has paid an annualised dividend of 6.2% (£2.18). With the exception of the pandemic, the company has increased its dividend payment every year for as far as records show (2002).

Despite an expected slowdown in tobacco consumption globally over the coming decades, British American Tobacco has already successfully diversified into non-combustible (vape) products.

This action, along with price increases for tobacco products, is expected to more than offset the growth lost from its combustible portfolio, leading to earnings growth of around 6% per year.

Conclusion

I believe GlaxoSmithKline and British American Tobacco offer a growing dividend and operate in predictable markets. Furthermore, over the last two years, both management and board members have purchased shares on the open market on several occasions.

These investments provide passive income and allow me to park my money as I look for additional investment opportunities in the event of a recession.

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George Theodosi owns shares in British American Tobacco and GlaxoSmithKline. The Motley Fool UK has recommended British American Tobacco and GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Royal Mail’s operating profit fell slightly in FY22 to £612m down from £620m in the previous year. Considering the current valuation of £3bn, I don’t believe Royal Mail is excessively valued as the market is pricing in a decrease in profit next year.

Royal Mail benefited from the pandemic as online orders and parcel volumes increased. As parcel volumes normalise, inflation is putting pressure on UK consumer spending (and Royal Mail), thereby constraining potential 2022 online shopping volumes.

Is the dividend safe?

The 6.3% dividend represents roughly £191m or 32% of total net income. Analysts are guiding £400m in net income next year, which would be enough to maintain the current 20p dividend. Looking further out, analysts expect net income to reach £554m by 2025. This illustrates that the dividend is relatively safe and potentially growing. While there are short-term headwinds with inflation and consumer spending, Royal Mail’s business has historically been stable, with small demand spikes around Christmas.

Furthermore, management completed a £200m buyback last year, giving existing shareholders more ownership in the company. Although Royal Mail holds £872m in debt, it could easily reduce its leverage at any point as it has roughly £1.2bn of cash on its balance sheet.  

Risks to consider

Public companies with an attractive dividend yield over 4%+ tend to be highly sensitive to changes in earnings expectations and dividend announcements from management. This is because most investors made the decision to invest based on a growing or relativity high dividend. Any slight revision to dividend payouts will lead to an immediate valuation adjustment.

Royal Mail invests every year in new property and equipment in order to maintain its operational edge. In an inflationary environment, these investments (capital expenditures) cost more and have a larger impact in total free cashflow.

Furthermore, higher fuel prices continue to impact operating profit as GLS operating margins decreased from 8.9% in 2020 to 8.1% in 2021. However, these issues are partly being mitigated by the rollout of an automated parcel sortation system, which will reduce personnel sortation costs.  

One for the watchlist  

I have put Royal Mail on my watchlist despite the impressive 6.3% dividend. I’d like to see how consumer sentiment holds up as the Bank of England raises rates. Last week, Royal Mail warned of higher prices. I’d also like to see how Royal Mail performs in terms of operating margins and parcel/letter volume as it passes higher costs onto the market.

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George Theodosi has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Card Factory (LSE:CARD) shares have rallied more than 9% since the start of May as the card retailer reported better-than-expected results on 3 May. The company posted revenue of £364m for FY22 (calendar 2021) and management expect revenue to recover to pre-pandemic levels this year. Card Factory also reported its first pre-tax profit since the start of the pandemic, at £11m. These are remarkable results considering its stores were closed for all Q1 2021.

Card Factory added four (net) new stores in FY22, with continued plans to expand over the coming years as management progress towards achieving their target of £600m in total revenue by FY26 (calendar 2025). 

New CEO Darcy Willson-Rymer has had an impressive first year since he took on the heavily distressed retailer in 2021. Facing significant financial and operational headwinds during the three national lockdowns, Card Factory appears to be staging an effective turnaround.  

Recently, management successfully negotiated new finance terms with their credit providers, which has removed the contingency for a £70m equity raise. This removes the risk of investors being significantly diluted, which I believe was the main reason why investors have ignored Card Factory for the past year. When the positive news broke on 21 April, Card Factory shares rallied from 45p to 60p.  

Attractive valuation   

Without the risk of dilution, I believe Card Factory stock remains cheap with a forward price-to-earnings (P/E) ratio of 9.4x and a two-year forward P/E of 5.7x. Historically, Card Factory has traded around a forward P/E of 9.8x, suggesting a cheap proposition for me. If the business can regain to pre-pandemic profit levels around £50m in the coming years, the stock could more than double from current levels.

Recession risk 

With the increased risk of recession, Card Factory is well positioned to combat a weakening economic environment. During recessions, consumers are increasing likely to visit various stores as they search for the most attractive value propositions. Card Factory is positioned as the lowest-cost UK gift card retailer, and should be able to maintain its cashflow during recessionary periods. However, average basket spending could decrease as consumers purchase lower priced cards and avoid higher ticket items like balloons or small gifts.

The UK greeting card market is slow and stable, meaning I don’t expect high levels of growth in the long term. The recent 28% increase in revenue year-over-year is impressive, but Card Factory is recovering from a low base due to temporary store closes in 2020 and 2021. Increased freight and labour costs are having an impact on margins; however, Card Factory has started targeted price increases instore.

When’s the dividend coming back?  

Card Factory has paid a dividend every year since it went public in 2014. However, the distributions were suspended during the pandemic. The board plan to reinstate a dividend at the end of 2025 when its debt profile has improved. Prior to the pandemic, shareholders received a dividend of 14p. Based on today’s share price (64p), investors could receive a dividend yield of 22% in three years’ time.

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George Theodosi owns shares of Card Factory. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.