No articles I have read, regarding Boeing’s 737 MAX 8 tragedies, have mentioned the possibility of Boeing filing for bankruptcy. Perhaps mentioning bankruptcy sounds alarmist. At this point, we do know the Transportation Department’s inspector general has begun an inquiry into this plane’s certification; while the FBI and the U.S. Department of Justice are engaged in a criminal investigation of the 737 MAX’s certification. To be sure, civil lawsuits will pour in and perhaps significant aircraft order cancellations will ensue. Between legal expenses, criminal fines, and lawsuit settlements, Boeing and its insurers may find themselves shelling out enormous sums of money. With Boeing being a company in the Dow Jones Industrial Average, it is reasonable to believe this jumbo-sized company will survive the financial repercussions of the MAX 8. Having dug into Boeing’s financial information, I’m not so sure.
In past articles, I have written about my distaste for stock buybacks. In two articles, I predicted the bankruptcies of RadioShack and Sears; and demonstrated how irresponsible stock buybacks demolished the balance sheets of both of these companies and made them too weak to survive the changing retail-business landscape. I have always questioned the wisdom of weakening a company’s balance sheet by reducing its cash, working capital, and equity positions via stock buybacks. In a world of uncertainty, how does management have the ability to foresee a company’s future financial needs? Possessing a strong balance sheet is the key to having the ability to capitalize on opportunities that may arise and to survive unforeseen negative circumstances that may emerge. In my opinion, Boeing has taken its stock buybacks to the point where it is presently vulnerable to debilitating financial distress related to the fallout from its 737 MAX aircraft.
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During this decade, Boeing initiated an aggressive stock buyback program beginning in 2013. Over the six fiscal years of 2013 through 2018, Boeing’s share buybacks amounted to $40.79 billion. Revenues, through this same period, totaled to $562.13 billion while net earnings totaled to $39.16 billion. With dividends clocking in at $16.19 billion, from 2013 to 2018, buybacks and dividends exceeded net earnings by $17.82 billion.
So, what happens when buybacks and dividends exceed earnings by such a significant amount? In Boeing’s case, the balance sheet suffers dramatically. At fiscal year-end 12/31/18, Boeing’s cash and working capital looked okay at $7.64 billion and $6.24 billion respectively. However, Boeing’s equity was shockingly small at only $410 million. When considering that this aircraft maker had total liabilities of $116.95 billion, Boeing’s total-liabilities-to-equity ratio was terrifyingly high at 285 to 1.
With Boeing’s March 31, 2019 10-Q recently published, the financial picture is even worse. Although the company’s net income was healthy at $2.15 billion, stock buybacks and dividends amounted to $2.34 billion and $1.16 billion respectively. These irresponsible cash expenditures have resulted in an even weaker company with only $232 million of equity. With total liabilities of $119.98 billion, Boeing’s total-liabilities-to-equity ratio is recklessly high at 517 to 1. Boeing’s financial condition is terribly weak.
To add fuel to the fire, the U.S. Securities and Exchange Commission (SEC) is investigating Boeing. Per Bloomberg:
Officials in the SEC’s enforcement division are examining whether Boeing was adequately forthcoming to shareholders about material problems with the plane, said the people who asked not to be named because the probe isn’t public. The agency is also reviewing the aircraft manufacturer’s accounting to make sure its financial statements have appropriately reflected potential impacts from the problems, the people said.
For a company potentially facing an enormously negative financial impact from the 737 MAX’s problems, and the SEC reviewing Boeing’s accounting of such an impact, will Boeing’s equity fall into negative territory? Moreover, will the SEC comment on the negative impact stock buybacks have had on Boeing’s financial well-being? I have no doubt the SEC’s investigators are going to be stunned by the financial mismanagement perpetrated by Boeing’s top executives.
Although Boeing has halted share repurchases to preserve cash, per the above-mentioned Bloomberg article, is this too little too late? Wall Street doesn’t thinks so as Boeing’s stock price is over $350 per share. This makes me wonder if Wall Street analysts are even reading Boeing’s financial statements; as Boeing’s book value per share, at 3/31/19, is 23 cents. In my opinion, Boeing is a company teetering on the brink and could be forced into bankruptcy resulting from a toxic combination of reckless financial management and reckless disregard for producing safe aircraft.
