Is Boeing Wasting Your Money?

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Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.

But don't forget -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use the announcement as a reason to buy by itself, rather use it as a launching pad for additional research.

Returning value
Having put a halt to its share repurchase program three years ago, aerospace giant Boeing (NYSE: BA  ) intends to jump-start it again, investing as much as $2 billion next year while at the same time hiking the dividend 10% in an effort to return value to shareholders.

A recent Wall Street Journal article highlighting the original $7 billion buyback plan had been adopted in 2007 when the plane-makers stock was sitting at record high prices of $105 a stub. It then spent two years buying up these high-flying shares, spending $3.4 billion in the process before calling a halt to more buybacks in 2009. The funny thing is, that's when Boeing's shares were at some of their lowest levels ever, having dipped below $30. So management bought when prices were high, and then refused to invest when they were at bargain basement levels -- the stock has gained 160% since then. Is there a reason to think its timing will be just as bad this time around?

The suspension of the buyback program didn't happen in a vacuum, though. It was mired in delay after delay of its Dreamliner 787 program, facing lawsuits, and laying off employees. Yet now that it's starting up again, it faces some difficult times too. If the country goes over the fiscal cliff, sequestration goes into effect and defense spending will face mandatory cuts of $500 billion over the next decade in addition to the $500 billion enacted last year.

Boeing is the Pentagon's second largest supplier behind Lockheed Martin (NYSE: LMT  ) . It's already committed to restructuring the defense segment of its business including consolidating its far-flung operations, cutting staff 30% from 2010 levels, and cutting $1.6 billion in expenses by 2015.  

Playing defense
It's not alone in needing to face a more streamlined future. Lockheed, Northrop Grumman (NYSE: NOC  ) , and Raytheon (NYSE: RTN  ) have also engaged in cost-cutting initiatives and looking overseas to make up some of the lost domestic revenues. Yet with defense spending accounting for 40% of Boeing's revenue s, changes will have to be made.

Of course, even if those cuts start, Congress can and most likely will rectify the situation by rewriting the law, and if the negotiations somehow bear fruit, Boeing can always up the buybacks. Some analysts were disappointed with the buyback announcement, hoping they would actually be more aggressive, yet others anticipate the plane maker will buyback an awful lot of stock very fast and then authorize a new program the following year .

Gaining altitude?
Citigroup (NYSE: C  ) estimates the buyback and dividend announcement would return to shareholders 60% of 2013's estimated free cash flow, so they're optimistic the company anticipates it will be able to keep growing in the face of its difficulties. Its backlog grew by $24 billion to $378 billion last quarter.

Yet a looming union strike could derail those plans, causing it to lose $250 million a day and threatening to strike out at its own suppliers, including General Electric (NYSE: GE  ) and Honeywell (NYSE: HON  ) , and has my Foolish colleague Rich Smith questioning whether Boeing can live up to its responsibilities to shareholders, buybacks or not.

I'm not sure Boeing has proved it can effectively buy shares when you'd want them to get the biggest bang for its buck -- when they're low. Instead it's shown it buys them on the way down and misses out on the best prices, and with a host of problems facing it, looks poised to repeat that error. But let me know in the comments section below whether you agree it will be grounded, or if you expect it to gain altitude. 

Boeing's execution problems and emerging competitors have investors wondering whether the company can pull it off. In this premium research report, two of the Fool's best industrial stock analysts have collaborated to provide investors with the key, must-know issues around Boeing. They'll be updating the report as important news hits, so make sure to claim a copy today by clicking here now.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 26, 2012, at 2:24 PM, snapcap wrote:

    When things get tight, I would expect a company to suspend share buybacks. When things are good, excess cash can be used to buy back shares. Unfortunately, share prices don't always cooperate. Ideally, when things are bad, and share prices are low, a company should be buying shares. Doesn't work that way.

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