I find it hard to believe the United States would allow its biggest exporter, and one of its largest defense contractors, to go out of business, especially under the Trump administration which pays very close attention to trade. The market is currently telling us there is a possibility that Boeing could cease to exist as it currently is formed, and is pricing its stock accordingly, down over 60% from its highs.
I see this as opportunity, but investors need to have their eyes wide open to the risks.
The main problem is debt load and cash flow. Unfortunately the firm was not well managed during the good times, so it is taking it on the chin during the crisis. Boeing borrowed money to buy back stock and pay dividends, which was very good at the time for management and shareholders, but is leaving employees holding the bag now that orders have dried up.
With new management, it will be curious as to how the company proceeds in the future. Many analysts say a complete cultural change is needed to be able to move forward successfully. There are doubts if the new CEO Dave Calhoun is up to that task, since he is an insider and previously was the firm's chairman.
“He’s not new blood,” said Bank of America Merrill Lynch senior aerospace and defense analyst Ron Epstein. “He seems like a capable manager, but he was on the board when all the decisions were made," reported CNBC.
The recent comments that Boeing will not under any circumstances take money from the government if it requires partial ownership by Uncle Sam is telling. This means the company sees a way to survive without government help. The risk is what does any future funding do to the stock holdings of public investors. Would there be dilution? Would there be a restructuring? This is the risk we see to investing in Boeing.
Here is a good explanation of cash flow issues and deleveraging by Seeking Alpha.
Boeing declared recently that the dividend will be suspended for the foreseeable future and David Calhoun will forego his salary for the rest of the year.
The Chicago-based jet maker also said it's suspending its shareholder dividend "until further notice." Boeing paid $4.6 billion in dividends during last year, according to financial cash flow statements, laid out in annual securities filings, reported BizJournals.
The steps announced include CEO Dave Calhoun and Board Chairman Larry Kellner both forgoing all pay until the end of 2020, Boeing said. Calhoun earns $1.4 million a year, though he didn't renounce his right to collect $10 million in restricted stock units he received that won't vest for three years. He received those as compensation for what he left on the table by leaving his former employer, BlackRock.
For a long term position, we think the benefits outweigh the risks for this famous American brand. Political support is on Boeing's side. If you can stomach the volatility, it seems to us Boeing will be higher than where it is now in a year or two when air travel returns to some semblance of normality.
This is not investment advice. Please consult your financial advisor before making any changes to your portfolio.
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