The Dow Jones Industrial Average (DJINDICES:^DJI) is within spitting distance of 20,000, and from that perspective, stocks have never been more expensive than they are today. But try telling it to the companies that make up the index. They're going on a shopping spree.

Case in point: Boeing (NYSE:BA) stock closed at $154.50 a share on Friday and is within just a couple of bucks of its all time high. Yet Boeing management thinks its stock is cheap and last week announced plans to buy back $14 billion worth of its own stock -- roughly 15% of all shares outstanding.

Airplane Ascending
Boeing stock soared in 2016. So why is it buying back stock now? Image source: Getty Images.

Is this a savvy financial move to buy up undervalued shares, or a misguided attempt by management to support the price of Boeing stock? Today, we'll find out, as we ask two basic questions.

Can Boeing pay?

Boeing cannot afford to buy back $14 billion worth of stock immediately. But despite its size, given enough time, this buyback is definitely within Boeing's reach. According to S&P Global Market Intelligence, Boeing already has $9.6 billion in cash and short-term investments on its books. Granted, some of this money is needed to fund the company's ongoing operations. Granted, too, it's not entirely unencumbered cash -- Boeing also carries $9.8 billion in long-term debt.

But S&P Global data shows Boeing generating $8.15 billion in free cash flow annually. That money, combined with what Boeing already has in the bank, should suffice to fund the company's entire $14 billion buyback in less than a year -- should Boeing decide to proceed with it.

Should Boeing pay?

And I really see no reason why Boeing should not proceed. Sure, its shares are nearing their highest price in history -- but that doesn't mean they're too expensive to buy. Business is booming at Boeing, and profits are rising hand in hand with the stock price. In fact, at a price-to-sales ratio of 1.0, Boeing stock is priced almost exactly right relative to the usual valuation according to large, growing, profitable companies in the aerospace and defense industry.

Historically, at P/S of 1 has usually proved to be the "right" price for aerospace and defense stocks, and the mean to which such stocks revert. That's a historical fact that doesn't bode well for investors in Boeing rivals such as Lockheed Martin, Northrop Grumman, or Raytheon, all of which are selling for between 1.6 and 1.7 times annual sales. But for Boeing investors, it spells opportunity.

Consider that in 2016, Boeing spent $7 billion on buybacks. Over the course of the year, Boeing stock has risen 10% in price, which already suggests those buybacks were profitable for the firm. What's more, over the course of the year, Boeing stock fell as low as $108 before hitting its recent high of $154 -- implying Boeing may have earned as much as 42% returns on some of its buybacks.

Authorizing buybacks today, and implementing those buybacks whenever Boeing's stock price falls below this fair value price over the months and years to come, seems to me a fine way to deploy Boeing's ample cash flows -- and a great way to maximize shareholder value.

Fool contributor Rich Smith does not own, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 345 out of more than 180,000 members.

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