On Friday, April 5, 2019, after the markets closed (companies like to release bad news this way), Boeing announced that the company would cut production of its 737 airplanes from 52 per month to 42 per month. According to Boeing’s CEO Dennis Muilenberg, “We're adjusting the 737 production system temporarily to accommodate the pause in MAX deliveries, allowing us to prioritize additional resources to focus on software certification and returning the MAX to flight.” In the same press release, the company admitted that the 737 aircraft's “MCAS function” was a “link” in a chain of events that caused the Lion Air Flight 610 and Ethiopian Airlines Flight 302 accidents. Boeing is working on a software update “that will prevent accidents like these from ever happening again.”
As might be expected, investors responded by selling off the stock in after-hours trading on Friday, continuing the sell-off today. The stock is trading at $374.61, down 16% from the all-time high of $446.01 on March 1, 2019. The all-time high occurred just 10 days before the Ethiopian Airlines fatal (and heartbreaking) crash on March 10, 2019. Since then, more and more bad news for Boeing has unfolded. But the stock has stayed fairly resilient. How’s that the case?
In short, buybacks. The 737 production is not the only thing that Boeing will have to cut. Boeing has one of the biggest buyback programs on Wall Street. On the Boeing investor’s home page, the company boasts that it has given out $50 billion over the last five years in buybacks and dividends.
The problem with excessive spending on buybacks and dividends is that, at least in 2018, the amount given back was more than the company made. In other words, like many dividend-paying, debt-laden Blue Chips, Boeing has been using buybacks to prop up their own stock, which makes their earnings look stronger than they really are, and lowers the price-to-earnings ratio (by reducing the share count). In 2018, Boeing repurchased $9.3 billion in shares and paid out $4.6 billion in dividends, for a total cost to the company of $13.9 billion. Since the net income of 2018 was only $10.45 billion, Boeing paid out $3.45 billion more than it earned.
At the end of 2018, Boeing’s cash was down to just $7.6 billion, from $11.7 billion in 2014. That’s flying a little too close to the trees, considering the production cutback. So, it’s likely that Boeing will be borrowing as quickly as possible. That would trigger a rating for the debt issuance, which will be negatively impacted from the production cut and the grounding of Boeing’s largest revenue generator, the 737. This doesn’t mean an automatic downgrade, but it will be included in the analysis. The 737 accounted for 70% of the planes delivered in 2018, at 580 out of 806. The company may wish to postpone raising debt until they get the all-clear on delivering the 737 again. In this scenario, they may have to preserve capital and postpone share repurchases, allowing the stock to trade freely on investors’ whims.
As you can see from the attached Stock Report Card, Boeing already has an astronomical debt/equity ratio and the highest price to earnings ratio of its peers. So, given the amount of debt that Boeing already has, combined with all of the lawsuits over the plane crashes and a worldwide grounding of the 737, Boeing may find their loan or bond covenants with strings attached – such as the money can’t be spent on buybacks or dividends.
The last company to make headlines for paying out more in buybacks and dividends than it earned in income was General Electric. General Electric’s dividend has been slashed to 4 cents, and the share price has dropped by more than 70% from where it was in 2017.
Boeing’s capital situation, and a pause in the company’s share repurchases, could affect the share price as much or more than the 20% reduction in 737 production. Boeing is authorized to repurchase up to $20 billion of its own stock. However, the math doesn’t add up on executing that at this time.
Boeing executives and staff will be working around the clock to get the software fixes needed to get the 737 back in the skies as quickly as possible. Boeing is a stalwart brand (until these latest tragedies) with products that are very much needed in today’s world. There are a slew of government insiders on the Boeing board to help facilitate a fast approval once the 737 is ready to fly. However, whenever that occurs, which could be within a few short months, the prudent investor will be looking at the balance sheet to determine whether or not that 2.10% dividend is worth gambling your principal on at this time. The production slowdown will impact earnings for at least a few quarters going forward.
Boeing is not the only debt-laden blue chip that is spending a lot more propping up its stock and paying out dividends than it is earning in net income. Stay tuned to my blog at NataliePace.com/Blog for a more complete report later this week.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.