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 ~$9.9B in cash on the balance sheet at the end of September, Boeing still has substantial cash available to repurchase at a faster rate even if it returns above its targeted 80% of free cash to shareholders. This new authorization has the same 2-3 year target, but we expect Boeing will buy back at a faster rate as it has with the last two authorizations.
Unambiguously positive from a shareholder perspective.
Analysts don’t know the difference between preferred stock and livestock.
The outlook speaks for a nearterm more disciplined negotiated pricing policy for their production. MAX or 787 cancellations are Holy Grail, as it allows for remarketing those newbuild slots at higher closing prices. The authorisation to raise the share Buy-Back Envelope to 14 G$ can be a token for an anticipation of improving contract proceeds. Possibly the hard-discounting pissing contest opposing Airbus and Boeing is coming to an end ? It is high time, because airlines are now seeing the end of the slump tunnel, so it is but legitimate for the OEMs to manoeuvre preparing to get a better share back of the blockbusting intermediate industrial added values which are sourced in their paxliner FALs ?!
I agree. Through order cancellations for the 787-8 and the selling of new 787-9s, I think Boeing has done a great job at replacing older and lower-profit 787-8 orders with newer and higher-earning 787-9 orders. So, when I hear about a bunch of older 787-8 orders that have been cancelled, I feel that this is probably pretty good news for Boeing for they can replace these orders easily and at more profit.
Outright cancellations : yes.
cancellations that actually were conversion ( +deferrals )?
How much of the sales activity after lets say 2008/9 ( well after a jump in list price ) were “real new sales”?
look for the -nn8 +nn9 lines in the orders history.
At the moment ~170 787-8 remain to be delivered.
I think you are right about the “Conversions”. While Boeing may make some significant money for these, I can’t imagine them making near the money had an outright cancellation occurred and a near-time production slot opened.
And, there’s other ways to do conversions, too. Recently I read where some 787s were converted to 777-300s at a reduced price. Yeah…not much money to be made here, but still a lot more than if the 787s were delivered. Plus, new slots open up.
What I am trying to say is that thought cancellations and conversions….perhaps Boeing’s 787 Price situation is getting better and this will mean losses per plane can be minimized. I remember a few months back when Emirates cancelled 70 A350s – I bet Airbus secretly rejoiced over that cancellation for it opened up near-term production slots and ridded the backlog of a lot of a lot of A350s which were probably sold for much less than they were worth (and Airbus has admitted that the first A350s that they sold were sold at prices which were too low to insure a profit).
IMO it is insane to buy back stocks in the current situation. There are to much risks on the horizon including economic downturn, 737 position, 787 won’t be a real cash cow for some time, drop in military spending, etc. etc. I would never buy Boeing stocks ATM. Never. They should invest in the NSA and MOM and cancel this bull. A dividend is fine but anything else – no.
What you describe makes economic sense for the company.
But not for its stockholders.
In the US the stockholders and their interests are paramount, way way above the long term interests of the company.
It is what is is really.
When do they buy back all the stock ever issued? How many share are out vs bought back?
Does that make Mullenburg (sp) the largest owner in Boeing stock?
Do they just burn the certificates?
From a reality approach it seems insane.
Put that money into a 737RS and or MOM and acutely accomplish something with it!
Sell lots of airplanes and just give the shareholders money?
The wheels really have come off capitalism.
No. McNerney owns a lot more and so does Ray Conner.
Scott: tongue in cheek, I was curious what happened to the stock, electronically burned it sounds like.
The stock is in fact virtually “bured”. It get’s “destroyed” / taken off the market. In fact it’s more-or-less the opposite to a fund-raising campaign buy issuing more stocks.
Yes it is insane, but thats what Wall St wants. Share buybacks, which are then cancelled have the effect of boosting the share price and the bonus of the top executives. Im not sure of the total amount of buybacks for Boeing, but you see the scale for large american companies when the NY Times said since around 2000, IBM had share buybacks ( mostly with borrowed money) were just over $100B, while dividends were around $30B.
For a business like Boeing $14B would pay for a new MOM plane, but if they did that the share price would tank, and its a stockholder business first. It used to be said going private meant you could spend up to grow the business, but instead they return even more money to the owners.
Doesn’t that turn into a self fulfilling prophecy ?
You keep buying off the shareholders with money from past successful projects and don’t come out with new ones, eventually the source dries up (or doesn’t return in less than 10 years) and upside down you go.
In technical terms, which the readers here should love, if the price paid for shares bought back is below about 120% of the asset value, then it makes good sense. I dont know if this is the case for Boeing.
Its better than buying another business to grow the company.
In theory share buybacks increase the value of remaining shares, and with rock bottom interest rates is ‘affordable’
As far as I know, the only logical reason for buying back your own stock is because you think that is the best investment you can make. Or to put it another way, the shareholders can find better things to do with their money (i.e. in other companies that need money) than anything the management can do to increase the value of their own company. So if you can’t increase the total value the best you can do is to reduce the number of people who have to share the value.
Maybe that is the reality of aircraft production. There are no technological breakthroughs that are going to greatly increase the demand for new aircraft (above the current gradual expansion). We are not going to see a new development that immediately makes all existing aircraft obsolete.
I often think about that when I am flying. The first time I flew (on a HS Trident) I landed at LHR and saw one of the very first 747’s. Now, 47 years later, I am still flying PHX to LHR on a 747, and even if it changes to a 787 the feeling inside is not going to be that different.
The thing that has changed beyond all recognition in that time are the avionics, and Boeing doesn’t make the avionics.
Developing a Hyperloop type product might be the sort of thing that could bring exponential growth to a company like Boeing, but large companies really seem to have a problem thinking and acting so far out of the box.
Quote: “Developing a Hyperloop type product might be the sort of thing that could bring exponential growth to a company like Boeing, but large companies really seem to have a problem thinking and acting so far out of the box.”
I think Boeing has been pretty smart to stay away from projects like this – that are probably beyond the financial capability of any company. The Chinese are the first to have made High-Speed rail an unequivocal success, and it took an unprecedented combination of population density, government foresight, finances and patience to make it happen. Today, Chinese High-Speed Rail is so fast and efficient that it successfully competes against Jetliners: THAT is a triumph of Engineering Economics on a scale that one rarely sees in human history! Maybe the Roman Road System is the closest analogy I can imagine. But…even as good as the Chinese are with great projects (OMG: Have you seen their Highway System?), I can’t even imagine the Chinese getting the Hyperloop to work – much less the US or Europe where a lot of Government Coordination and Finances would be necessary.
Right now, the technology exists to build High-Speed Trains between dense city pairs in the US that would put most Passenger and Freight Services between those cities out of business. I’m thinking LA-to-San Fran or New York-to-Chicago via Philly, or maybe even Houston-Austin-Dallas. If the US had the Societal Wherewithal to construct even one of these lines, then I might say…”Yeah, lets give the Hyperloop a serious look”. Until then, I’d say that the Hyperloop is far beyond what we can do.
The French and Japan were the first ones to make high speed rail a success, not China.
The main line south from Paris to Maiselles reached capacity so they introduced double decker carriages. Japan has high densities too and challenging geography including separate islands.
Essentially the Chinese copied the Japanese/French technology.
Doesn’t buying your stock and then burning it wind up giving the money to someone else?
they walk away with money, shareholders walk away with more money but the company continues to loose.
Seems like a death spiral to me.
ref dare100em : IMO it is insane to buy back stocks in the current situation
ref dukeofurl : yes, it is insane
You need to consider that Boeing shareholders factually are insiders vs their own stock. As such, they have access to privileged knowledge. Besides, they control themselves the mechanical impact of a stock buy-back : the quantity P/N (annual profit divided by number of shares in circulation) directly sets stock PER expectation, because E per share increases if N decreases. What we can safely assume is that Boeing has insider knowledge that stock will escalate, so they decide to buy back cheap now, or it will cost more tomorrow. By doing this, they cause part of the expected escalation. What matters is company stock value SV = Q x N (quotation times number of shares in circulation = total capitalisation) : Q is apprx. 148 $. Say SV equals 100 G$, you initiate a shares buy back scheme over a few months for total 14 G$, immediately, the shares escalate. If the increment to Q is sufficient, the total capitalisation remains stable, ie there is no loss of substance involved to shareholders. But I put 1 € down on the table in a bet that Boeing has some utterly interesting communications in preparation for the market up their sleeve, for nearterm release. They know, we don’t know. The share buyback is the smoke in the barn signalling a fire soon coming ablaze ?!
What I take out of this is Boeing looses capital that should be invested.
While it may make the shareholder giddy in the short term, when the wolf comes calling for its overdue loan (now there is a twisted phrase) the stock tanks.
Regardless, unless its BOEIUNG who issues the stock for sale, then its taking money from Peter (development project) to pay Paul (who is a wayward drunkard)
I am sure I don’t get it buy sometimes the simplest take is the best one.
In short a sort of Pyramid scheme. An addictive way for managers to take the guts out of a company so they get theirs.
Scott and Bjorn , I have been patiently awaiting your analysis of the baffling events at Rolls Royce. A year ago they announced a big share buyback, then cancelled it a few months later and issued profit warning. Recently a bit of a crisis seems to have developed.The explanation given blames the A330 &A350(other than the marine side), nothing that was either unpredictable or even unexpected. As I understand it, new engine’s are given away and money is made from support and spares. There are plenty of A330s around needing spares and it sold better than expected right until the end. The A350 is not that particularly slow in achieving production. What’s the problem?
RR existing accounting practices are no longer accepted. They booked future profits of long term maintenance contracts for the full length of the contract at the time of the sale of the engines. I believe that is no longer allowed under EU rules from 1 July 2016 onward. So now they need to book the engine sale at the actual profit or loss and can record the incremental profits on the service contracts only when the service has been actually performed.
So the switch from the existing accounting practices to new EU rules will have a significant one-off impact. It will take a couple of years to stabilize: the profits for existing contracts have already been booked while new contracts will be far less profitable at the time of signing than the old ones. Over the life of the contract, the effect is the same but the switch-over from one form to another form is very painful.
So it’s a Boeing style fwd profit push. RR nor any financial analysts mentioned anything like this, but I do find your explanation quite convincing.Might the same thing happen to Boeing?
I finally figured out the right phrase for the Boeing endless stock buy back.
Its called eating you seed corn (or whatever)
You need money to launch new products and its expensive.
If you think about it, once Boeing sell the original stock where is the money unless they are successful and issue MORE sock, not suck back old stock.
Someone sells Boeing stock and Boeing gets nothing for it.
The only plus is for managers and their bonuses and salaries but it has nothing to do with the health and benefit of the company.
Better off to declare bankruptcy, zero out the stock and start over, then they could sell it and pocket the money and do something with it.
the way they are going that may be where they wind up.
And C Series now has Type Certificate!
What I forgot to ask.
Are these buybacks launched as a reduction of capital or to have shares available for management gratifications?
Both. Buyback shares ( worth billions are cancelled) while new shares are issued to executives ( tens of millions).
Currently Oct 2015, there are 670m shares of Boeing Company outstanding.
The peak in the last 5 years shows in march 2013 of 778m and back in Dec 10 it was 735m.
Current market cap is around $100 bill which is about the same as yearly revenue ( may not be the same as actual sales income for year-)