(C) Common Dreams
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Pontifications: A contrarian view of Stock Buybacks [1]
['Scott Hamilton']
Date: 2023-04-25
By the Leeham News Team
April 25, 2023, © Leeham News: Airbus and Boeing last week held their annual shareholders’ meetings. Boeing continues to suspend dividends and stock buybacks as it struggles to recover from the grounding of the 737 MAX and delivery suspensions of the 767/KC-46A, 787, and 737 (again); and the years-delayed certification of the 777X. Losses and charges at its defense unit mount as well, hurting profits and cash flow.
Before the MAX grounding in March 2019, Boeing spent more than $60bn in stock buybacks since the 1997 merger with McDonnell Douglas. “Shareholder value” became a priority—and dirty words to those who long for the days of a Boeing based on engineering excellence vs focus on Wall Street and the stock price.
Airbus has taken over the lead in airplane engineering and innovation. Boeing in November deemphasized new product development and pointed to its guidance of $10bn in free cash flow by 2025. However, Airbus now puts shareholder value as an important business goal. At its annual meeting, Airbus continues its dividend and stock buyback programs. But Airbus buybacks and dividends are a fraction of what Boeing has spent and Airbus committed to a €10bn war chest for future contingencies.
Stock buybacks remain a target of criticism. While our view of over-emphasis on shareholder value is well known—we favor a balance on free cash flow expenditures between shareholder value and new product development—there is another side to stock buybacks that haven’t been discussed.
Leeham News is going to take a step back and dig into the details of the buybacks, analyzing the numbers behind the repurchase program, its results, and possibilities for the future.
The Good, The (not so) Bad & The Ugly (question)
In the 2013 Boeing Annual report, this line appeared on page 39 under Financing Activities:
“During 2013, we repurchased 25.4 million shares totaling $2.8bn through our open market share repurchase program. There were no shares repurchased through the share repurchase program in 2012 and 2011.”
Thus began the annual stock buyback program of the 2010 decade at Boeing, which ran from 2013 to 2019, totaling a whopping $43.5bn. Given the subsequent issues Boeing has faced, there has been much criticism leveled at them, for spending free cash flow on their own shares.
Corporations are faced with a variety of choices regarding what to do when operations generate large sums of capital. Indeed, if one reflects on the decision-making process, an argument can be made that a buyback is no different than putting cash into term deposits, investing in the stock market, or buying commodities such as precious metals or fossil fuels. Everyone is looking for a return on their investment. Some corporations are just willing to bet on themselves.
Board members and executives benefit
Yes, it is true that the Board, the officers, and the executives of the company will benefit from an increase in share price that will usually occur as stock is taken off the market. Perhaps there need to be some limiting regulations added to how much can be repurchased. But the point remains that if one can objectively look at it as an investment, without emotion or ulterior motive, is there much difference between Boeing buying their shares and the Vanguard Group, Blackrock & Newport Trust – who combined hold about 62% of all outstanding shares?
From 2013 to 2019, the following buybacks were made (amount of shares is in millions).
Boeing Repurchase Program Year Amount Value (in billions) 2013 25.4 $ 2.80 2014 46.6 $ 6.00 2015 46.7 $ 6.80 2016 55.1 $ 7.00 2017 46.1 $ 9.20 2018 26.1 $ 9.00 2019 6.9 $ 2.70 252.9 $ 43.50
As of April 19, 2023, Boeing was trading at around the $208 mark. This would make those 252.9 million shares worth $52.6bn. This means that they are $9.1bn to the good on their buybacks.
If you are an investor in the market and looking at ROI, it isn’t outstanding – but they haven’t lost their shirts, which will come as a surprise to some. The 2018 and 2019 years hurt some, when Boeing bought back high, however it is balanced out by the repurchases in earlier years.
It’s not good, but it’s not so bad.
Boeing was savvy enough to use some of these buybacks to fund pension requirements in 2020:
“In the fourth quarter of 2020, we contributed $3bn of our common stock to our pension fund. In the fourth quarter of 2020, we also began using our common stock in lieu of cash to fund Company contributions to our 401(k) plans for the foreseeable future, which we estimate will conserve approximately $1bn of cash over the next 12 months. “
Boeing’s share price during November 2020 ranged from a low of $143 on November 2 to a high of $223 on November 24, so that $4bn funding cost them from a high of 27.9 million to a low of 17.9 million shares. This leaves them retaining between 225 million and 235 million shares from the buyback program (of 252.9 million repurchased), with a current value between $46.8bn and $48.9bn. Still well above the $43.5bn spent.
Now for the difficult question
As of Q4 2022, BA has a combined long- and short-term debt burden of $57.5bn. Annual interest and debt expense cost them $2.5bn for 2022. It was $2.68bn in 2021 and $2.16bn in 2020. That’s $7.34bn over the past 3 years and 2023 will push them close to the $10bn mark, if nothing changes.
Boeing can gain $48bn by selling those investments and wipe out most of their debt with the proceeds, putting the company on solid footing. Any taxes on the gain can be offset by expensing amounts from the deferred production balance on the 787 program, improving margins there.
There has been some Good and some Bad, but the Ugly question is whether those managing the company are that tied to stock valuation, that they fear the effect that selling those buybacks will have on the share price. Take the moderate (and surprising) win and move forward.
Takeaways
The Share Repurchase program has not been a disaster;
It has already been used to fund obligations like pensions; and
Cashing in now can reduce debt to single digits, from $57.5bn.
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