Boeing Co., after investing heavily in new jet designs, may seefree cash flow as much as double during the next three years to $18billion, raising the prospect of bigger dividends or stockbuybacks.

A record backlog of commercial-jet orders is setting up Boeingfor a surge in cash as the Chicago-based planemaker cranks upproduction and trims spending for aircraft development programssuch as the 787 Dreamliner.

That gives Boeing the ability to increase its dividend or beginits first new buyback plan in five years. The company may announcethe purchase of $3 billion of its own stock, equal to about 5percent of the total outstanding, as soon as the fourth quarter,said Peter Arment, a Sterne Agee & Leach Inc. analyst.

“If Boeing is able to execute successfully on this significantproduction ramp in front of them, they're going to have ahigh-class problem of generating a tremendous amount of excesscash,” said Arment, who is based in Birmingham, Alabama, and has abuy recommendation on the stock.

Free cash flow, or cash from operations minus capital spending,will total $18 billion from 2012 to 2014, compared with $8.5billion in the three years ended in 2011, Arment estimates. CarterCopeland, a Barclays Plc analyst in New York, projects the totalwill be $14 billion in the next three years.

“One of the reasons we own the stock is that strong cash flowgeneration which will accrue to shareholders over the next severalyears,” said Chris Wolters, a managing director with EpochInvestment Partners in New York.

Boeing is done with major development of the 787 and 747-8 jumbojet and is focused now on new variants of existing planes. Theplanemaker is working to raise production 40 percent by the end of2014, which is significant for revenue because airlines make about40 percent of their payments upon delivery.

Converting a 3,953-jet backlog into cash is the “top priority”for Boeing's commercial business, Chief Executive Officer JimMcNerney said. The money will go to small acquisitions andtechnology and be returned to investors, he said in a May 15presentation, without giving details.

“Cash flow is improving with the increase in commercial airplanedeliveries,” Chaz Bickers, a Boeing spokesman, said in a telephoneinterview. “There has been some decrease in R&D as we come offthe peak of the 787.”

Sweet Spot

Boeing hasn't been in this kind of sweet spot since the late1990s, after the 777's 1995 debut. As the 787 fell more than threeyears behind schedule before entering service in 2011, and as theinvestment in the plane rose to what Arment estimated is about $20billion, Boeing halted buybacks and left the dividendunchanged.

With a combined payout yield for dividends and repurchases of2.3 percent from last year, Boeing ranked 292nd on the Standard& Poor's 500 Index, based on data compiled by Bloomberg. Its$1.2 billion payout was 102nd, while its market value was No.49.

Boeing may announce a dividend increase to 49 cents a share inDecember from the current 44-cent payout, according to a Bloombergprojection. The company last raised that amount in December 2011,the first jump since 2008. Boeing left the payment unchangedyesterday.

“As an investor I like to see the dividend increases,” said GaryFlam, a partner at Bel Air Investment Advisors in Los Angeles whohelps manage about $6.5 billion, including Boeing stock. “It's astronger sign of faith in your underlying business than a sharerepurchase.”

Higher dividends lock Boeing into returning cash to shareholdersbecause the payments can't be reduced without negative fallout,Flam said. Share repurchases can be stopped at any time, hesaid.

Boeing stock shows the strain of delays on the 787, the firstjetliner built chiefly of composite materials. The shares tumbled30 percent through yesterday since the day before the firstDreamliner postponement, in October 2007. That was almost twice thedrop in the S&P 500 Index in the same period, and trailed the17 percent gain for Airbus SAS parent European Aeronautic Defenceand Space Co.

The stock fell 0.8 percent to $70.50 at 11:10 a.m. in New York.The shares dropped 3.1 percent this year through yesterday, whileEADS, based in Paris and Munich, was up 8.7 percent.

Boeing's bonds yield an average of 1.66 percent, less than the1.93 percent for EADS and 2.75 percent for all companies in theBank of America Merrill Lynch Global Large Cap Capital Goods &Building Materials index.

Buyback History

The planemaker's last share-repurchase announcement was for $7billion in October 2007, and Boeing spent only $3.4 billion and has$3.6 billion pending in the program. In the previous three years,Boeing had spent $8 billion on buybacks, according to a 2007company statement.

“I would expect that the company leans more toward firstreturning cash to investors through share repurchases,” saidCopeland, the Barclays analyst, who has an overweight/positiverating on the stock. “Share repurchases have been a part of thebalanced cash deployment strategy we've seen in the past, andthey've since eliminated that.”

Some of Boeing's cash will have to be pumped into its retirementfunds as pension liabilities rise because of low interest rates.Boeing expects to contribute about $1.5 billion in cash to itspension plans in 2012 and said the amounts may rise in futureyears, according to a Feb. 9 filing.

The company also may face pressure to deploy cash to bolsterprofits at its defense unit, which accounted for 47 percent of 2011sales, as U.S. military spending shrinks, said Alex Hamilton, anEarlyBird Capital analyst in New York.

“With the looming defense cuts, they should hold on to theircash and invest it internally,” Hamilton said. “You're going to getbetter returns.”

Boeing has reduced its ratio of total debt to earnings beforeinterest, taxes, depreciation and amortization to 1.7 times lastyear from as high as 5.2 times in 2003. The ratio at EADS is 1.6.And its current crop of aircraft programs will be less costly thanthe 787 and the 747-8. That should allow Boeing to boost profit,according to Copeland.

The 737 MAX will have new engines, a sturdier structure, amodified tail and winglets as part of a “very simple” upgrade, JimAlbaugh, chief of the commercial airplanes unit, said at the May 15conference. It will compete with Airbus SAS's re-engined A320neo,which gobbled up orders last year.

777 Overhaul

An overhaul of the wide-body 777, for which airlines have beenclamoring, probably will involve new engines and composite-plasticwings. That plane probably will come after a stretched version ofthe Dreamliner, Albaugh told reporters at a briefing in Beijing onJune 11.

Production increases are under way for the 737 and 777.

Output for the wide-body 777 is scheduled to increase to 8.3 amonth by early 2013 from seven now, and the 737 will climb to 42 in2014 from 35. The 737 makes up the biggest chunk of Boeing'soutstanding orders, with 2,605 in the backlog through May.

Even more important will be meeting targets for the Dreamliner,whose composite construction and supplier network were blamed forthe delays on the plane. Only this month did Boeing assemble thefirst 787 that won't require changes at a post-productionmodification center, where 50 of the jets are stacked up forreworking.

Dreamliner monthly production will rise to 10 by the end of nextyear from 3.5 now, Boeing has said. The model's order backlog is843 planes, and deliveries through May totaled 11 planes.

Counting the production increases, revenue growth from the 787will be more than $6.5 billion in 2013 compared with about $3billion from the 737 and 777, Yair Reiner, an analyst withOppenheimer & Co. in New York, wrote in a June 24 report.

Production for the 787 will require $4 billion of workingcapital this year, which is $3 billion less than in 2011. The 787program may be cash neutral next year and will add to cash flow in2014, said Reiner, who has an outperform rating on the stock.

Boeing's list price for the Dreamliner is as much as $228million, and buyers typically negotiate discounts from there. Thecost of building a Dreamliner probably will drop below the sellingprice for the first time in 2014's second half, Sterne Agee'sArment said. Boeing then will start recovering the investment inthe new plane, he said.

“What we would anticipate is the company will go out andrepurchase shares as well as modestly increase the dividend,” saidWolters, the Epoch Investment managing director. “That really comesdown to them executing the production ramp on the 787.”

Bloomberg

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