Is Boeing hurting itself with buybacks?

Published 9:00 pm Tuesday, June 28, 2005

The Boeing Co. announced plans for a 10 million-share stock buyback on Tuesday, and was scolded for it by an aerospace analyst.

The money Boeing already has spent buying back its own stock – more than $9 billion since December 2000 – “could easily have funded an entirely new airplane,” Leeham Co. analyst Scott Hamilton of Sammamish wrote Tuesday in an essay published online.

The new stock buyback, he continued, “plays straight into Airbus’ counterargument in the World Trade Organization battle.”

Hamilton – and he’s not alone in this – argues that the reasons why Boeing has fallen behind Airbus in recent years are largely of its own making.

Rather than investing in its core business of building airliners, Boeing has been busily trying make itself more attractive to Wall Street, buying up smaller companies in an effort to diversify and spending its cash to prop up its stock price, he asserts.

In the meantime, Boeing’s Commercial Airplanes Group has limped along trying to sell updated versions of older-model jets that couldn’t always compete with the new Airbus products.

Boeing’s successes this year are the result of spending money on a new airplane, the 787, and freeing up its sales force to cut better deals, Hamilton says.

“Boeing is proving that it can have a majority of the market it lost for the past four years to Airbus,” Hamilton wrote recently.

Teal Group analyst Richard Aboulafia has told me much the same thing in the past, discussing how Boeing lost its market dominance.

Airbus may have cheated on trade rules to get ahead of Boeing, he said. But just because Airbus was on steroids, Aboulafia said, that doesn’t mean Boeing wasn’t also in the wrong for pounding shots of tequila all night before the big race.

Boeing and many other corporations buy back stock in an effort to boost the per-share price. The thinking is that if a company tightens the supply of shares on the market, demand will drive the price of the remainder higher, and that’s good for shareholders.

That’s particularly true for big shareholders, Hamilton noted, such as former Boeing chief executive Harry Stonecipher and members of the McDonnell family.

But Associated Press business columnist Rachel Beck wrote recently that new research by stock analysts shows stock buybacks don’t always work. “The truth is that share repurchases often do little or nothing to boost shareholder value,” she wrote.

Paraphrasing a leading Morgan Stanley stock strategist, Beck wrote that “when executives choose to do buybacks rather than investing in a company’s future growth by putting money into its core businesses, they are ‘at least minimizing the upside return on their investment.’ “

In fact, instead of building shareholder value, buybacks could be “destroying value by ‘redeploying their excess cash flow to buy back expensive stock,’” Beck continued, still quoting Morgan Stanley’s Henry McVey.

Large companies that announced stock buybacks over the 12-month period ending in April actually saw their share values drop 4 percent, Beck wrote.

For its part, Boeing issued a statement Tuesday saying the company’s “strong financial and operating performance” and its growing orders backlog mean there’s money enough to buy back stock and still invest in new programs.

“Our overall goal is to achieve sustained value creation for our shareholders through the balanced deployment of our solid cash flow,” said Boeing’s interim chief executive, James Bell.

Reporter Bryan Corliss: 425-339-3454 or corliss@heraldnet.com.