Has Boeing invested enough in R&D? Could investing more instead of returning money to shareholders in the form of share buybacks and dividends have prevented the faulty automated system which supposedly was the cause of the two most recent fatal crashes?
- Boeing’s share price has risen more than 250% over the last 5 years. The DJI, of which Boeing is a part of, has risen about 60%; the S&P Index has risen about 50% during that period.
- Boeing has bought back a total of $39Bn of shares over the last 5 years which is actually just about half of the authorized amount. The 2018 share buyback payout ratio was about 76%. The share buyback has increased by 50% over this period, and at the moment it is one of the largest among US companies.
- As a result of the share buybacks, Boeing’s share count has been reduced from 767m in 2013 to 586m in 2018, or by about 24%.
- Over the same period Boeing has spent about $17Bn on R&D, about half the amount spent on buybacks; R&D spending has been flat in the last 5 years.
- Top-line revenue growth over the last 5 years is about 3% per annum which fades in comparison to share price growth, or EPS growth (see below).
- Bottom-line EPS annual growth rate, on the other hand, is about 24%. There is no doubt that this is a consequence of decreased share count (see above) simply by logical deduction. However, it could also be as a result of reduced costs (of which employment still is the largest, see below). Either way, both causes can be seen as a temporary phenomenon and not good for the company’s long-term prospects.
- Boeing has reduced payroll by about 10% over the last 5 years, despite total US full-time employment rising by 10% over the same period.
- Boeing has increased its dividend by 325% over the last six years. For 2018, its dividend payout ratio was 39%, which makes the total payout ratio stand at 115%, i.e. Boeing is spending more than 100% of its earnings on shareholders payouts. This is financed pretty much all by rising FCF rather than new debt.
- Nothing wrong with giving some FCF back to investors IF: 1) that does not jeopardize the company’s future profitability, which would be determined more by top-line rather than bottom-line growth – there is a limit how much costs can be cut; 2) that means, unintentionally, producing a defective product which not only cuts company’s profitability or causes, in extreme cases, actual physical damage to consumers. In both cases, the verdict on Boeing is still out.
To all the people who think share buybacks are the best way to utilize company’s resources, that they do not affect the company’s share price, that they do not reduce the share count and have no bearing on employment, Boeing is not your best example.