Dec. 16, 2015: Reaction among Wall Street analysts was mixed following the announcement by The Boeing Co. that the board of directors approved a hike in the stock dividend payments and the share buyback.
The announcement had been expected. The share buyback was increased from $12bn to $14bn in aggregate and the dividend was increased by 20%, to $1.09 per share. The latter was somewhat higher than expected. Boeing has repurchased $6.75bn in stock so far.
Initial reaction from analysts ranged from positive to cautious.
Buckingham Research (Sell)
|2015 share repurchases slightly disappointed. Share buybacks in 2015 totaled $6.75B; ~56% of the prior $12B authorization and below our $7.2B expectations (we think our expectations were in-line with consensus).
Our concern is that the pace of buybacks could be slowing. At the end of 3Q15, $6B remained of the prior $12B buyback authority and in 4Q15, $5.25B remained (BA notes that 2015 repurchases have been completed). This implies 4Q15 buybacks of $750M and while 4Q typically isn’t the strongest quarter for buybacks, that’s the lowest amount since BA resumed its share repurchase program in 2013 and a $250M y/y deceleration. We think that this could be significant if it’s an indicator that buybacks are slowing.
Although we think the stock could react positively to the $14B share repurchase announcement, we remain cautious. We think the $14B share repurchase announcement is a positive only if BA continues the current pace of share buybacks. We think investor expectations are that BA buys back >$11B of its stock in 2016-2017. We expect ~$6B in buybacks in 2016. However, if the $750M of stock repurchased in 4Q15 is an indications that buybacks are slowing, then it’s possible the $14B share repurchase authorization could be over 3-yrs and that would be a disappointment relative to investor expectations.
This [announcement detail] implies Q4/15 buybacks of ~$750M. Boeing expects to resume its buyback activity in January 2016.
This is the third straight year Boeing has made a capital deployment announcement in mid-December on a Monday (Dec 15 in 2014, and then on Dec 16 in 2013 when BA launched its $10B buyback program), and each time it has increased its buyback authorization and dividend.
We continue to believe that sentiment on BA is about as polarized as we have ever seen. On the one hand, many believe that the commercial aerospace cycle is very close to rolling over, and Boeing and Airbus have been over-producing for demand. Moreover, they believe that there are significant charges still to come on the 787, and rate cuts soon to be announced on the 777.
On the other hand, we believe that the current narrow-body backlogs support the announced rate increases (and we ultimately expect Boeing will announce a rate increase on the 737 to ~60/month). We do expect a rate cut announcement on the 777, as well as potentially on the 747, highlighting the risk with wide-bodies. However, we do not expect another charge on the 787, and we continue to believe that better-than-expected execution on the 787 will be the primary positive catalyst for Boeing stock.
Goldman Sachs (Sell)
Boeing states its future pace of share repurchase is at the discretion of management, but that repurchases under the new authority will be made over the next 2-3 years. The authority divided by the mid-point of that time frame equals a $5.6bn annual run rate, compared to our prior estimate of $4.5bn in each of 2016 and 2017. The new quarterly dividend of $1.09 compares to our prior estimate of $1.00. BA also announced its 2015 share repurchase totaled $6.75bn, compared to our prior estimate of $7.0bn.
Both pieces of the capital deployment announcement are likely higher than the market anticipated. However, Boeing’s historical capital deployment, like new aircraft fundamentals, can be cyclical, and (1) we think BA is buying back more stock while approaching the peak of new aircraft supply/ demand fundamentals (which has occurred in the past); and (2) we estimate this moves BA’s payout ratio above 50%, leaving more downside than upside risk to future dividend growth if OE fundamentals or BA cash flow disappoint, both of which we believe have high risk of occurring.
Wells Fargo (Buy)
Additional Share Buybacks Support More Shareholder Returns. Boeing announced that its Board of Directors authorized a new $14B share repurchase authorization to replace its existing $12B authorization. Since the prior one had $5.25B remaining, it means Boeing bought back $750M worth of stock during the fourth quarter. With ~$9.9B in cash on the balance sheet at the end of September, Boeing still has substantial cash available to repurchase at a faster rate even if it returns above its targeted 80% of free cash to shareholders. This new authorization has the same 2-3 year target, but we expect Boeing will buy back at a faster rate as it has with the last two authorizations.