Is Boeing giving too much money back to shareholders?

18 Monday Mar 2019

Posted by beyondoverton in Equity, Questions

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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.

Share buybacks must be seen through the shareholder primacy doctrine

12 Sunday Aug 2018

Posted by beyondoverton in Equity, Politics

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share buybacks

Buybacks are a direct and natural response to the shift in corporate management structure in the late 1970s which ushered in the period of ‘shareholder primacy’. It was Rule 10B-18 in 1982 which legitimized them.
Banning share buybacks without also changing the focus away from maximizing shareholder value will accomplish little because companies will simply find other ways to reach that objective.
The 1970s were a tumultuous period for the global economy with the two oil crises leading to stagflation and to enormous pressure on corporate profits. But the ground was set already in 1970 when M. Friedman published “The Social Responsibility of Business is to Increase Profits”.
In 1976 M. Jensen & W. Meckling published “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” which explored the idea of equity-based compensation for professional managers.
Finally, six years later Rule 10B-18 provided safe haven for companies to buyback their shares, allowing them another option to reward shareholders, in addition to dividends. The results were explosive.
Equity-based compensation rose from 0% of the median executive’s pay in 1980s to at least 60% in the 2000s; just in 1983, the aggregate amount of cash spent on share buybacks tripled and by 1985 it was 5 times higher than the average in the period 1972-1982.
With the incentive structure thus created in the 1980s, companies NOT doing buybacks would not be fulfilling their objective of maximizing shareholder value, notwithstanding that managers are also large shareholders.
Thus, banning buybacks makes no sense as it goes against the shareholder primacy doctrine unless, of course there is solid evidence that buybacks erode long-term shareholder value. So, therefore, the issue is not with buybacks but with the corporate management structure which has emerged since the 1980s.
Profit maximization and focus on shareholders has created extremely efficient companies boosting aggregate supply(AS), in many cases at the expense of aggregate demand(AD) at home, thus forcing those same companies to shift sales increasingly abroad.
It has also contributed to the concentration of both companies and shareholders, the former leading to the monopolization of US industries, the latter to US inequality->continuing with the shareholder primacy thus could indeed be damaging to corporate profits long terms once AD dries off even in EM.
I think it is difficult if not impossible to gauge the size of the effect of share buybacks on stocks prices or EPS, but there is no doubt that there is one: JPM, for ex. thinks effect on EPS growth is less than 10%, UBS thinks it is more than 30%.
Fed’s Z1 Flow of Funds reports a break-down of the major equity buyers each quarter: since 2008 corporates buying back their shares is absolutely dominant; the second biggest ‘buyer’, ETF, is three times smaller; pension funds and households net sold equities during that period.
The stock price of profitable companies like Apple should be rising on its own merit , but that does not negate the possibility that buybacks ‘juice up’ stock prices even higher than ‘justified’. It goes the other way too: with 22 consecutive quarters of declining revenues the stock price of IBM probably should be lower -where would IBM stock price be if not for buybacks?
If we are adjusting R&D to GDP, we might as well adjust share repurchases to GDP as well (and yes, they are also at record high). Tech companies raising their R&D – that’s great – but if they did not do any buybacks, could they have raised it even more?
The recapitalization argument (shifting from equity to debt refinancing) is probably the most logical argument in favor of buybacks, if it was not for the agency conflict of interest (managers are equity holders) and the fact that they could have also boosted dividends instead.
The argument that giving money back to shareholders could boost wages and investment somewhere else (therefore, where is the problem?) – yes, it could – but as far as I am aware there is not much evidence of this.