There are a number of ways that a company can return wealth to its shareholders. Although stock price appreciation and dividends are the two most common ways of doing this there are other useful, and often overlooked ways for companies to share their wealth with investors. Boeing Co. (NYSE:BA) announced yesterday that the board of directors approved a $10 billion increase in its stock buyback program. The move came as a result of a promotion of the company's sustained and strong operational performance that increased cash flows and confidence in future prospects.
Part One: Buyback
A stock buyback, also known as a share repurchase, occurs when a company buys back its shares from the marketplace. You can think of a buyback as a company investing in itself or using its cash to buy its own shares. For Boeing, this doesn't come as a surprise since it held a record $415 billion in backlogs when I last checked its quarterly report last month.
The buyback is the best use of capital at the moment. After all, the goal of Boeing's management is to maximize return for shareholders and a buyback generally increases shareholders' value. The company's reasoning behind the buyback is "we don't see any better investment than in ourselves." Though this statement could sometimes be false, for Boeing it appears to be the truth.
Boeing has been reaping an abundance of cash as it accelerates the production of some of its top-selling jetliners including the single-aisle 737 and the wide-body 777 and 787 Dreamliner. The shares have surged 79% this year putting it at the top amongst the 30 stocks in the Dow Jones. The buyback tops the company's previous record of $7 billion in 2007. With $800 million remaining from the last program it was evident that Boeing was going to initiate another program very soon.
The question that now persists is whether or not the company has sufficient resources to continue a buyback program. A look at the tables above paints a picture of Boeing's situation. During the 3rd quarter of 2013, Boeing generated more than $2 billion free cash flows. Additionally, by the end of 3Q13 Boeing earned a greater FCF of $5.3 billion.
By the end of the last quarter the company held cash and marketable securities that amounted $6.3 billion net of debt. The balances, net of debt, have increased by more than 10% this quarter on a yearly basis. The program is supposed to last 2 to 3 years beginning 2014. Assuming the company spends half of its cash flows on buybacks it will easily be able to fulfil repurchases and still be left with the other half of its reserves. What I am trying to say here is that Boeing holds sufficient reserves to support its buyback program. Moreover, the huge pile of backlog means that future cash flows will keep increasing.
Therefore, the buyback program is justified. What this means for investors is that the program will not only bring capital appreciation in terms of positive sentiment achieved by the market but it will also give investors a premium over market price when Boeing purchases its shares back from the market through its program.
Part Two: Dividend Increase
In the same way that a company can indicate the state of its operations through its use of capital-financing projects the company's management can also signal its company's earnings forecast through changes in its dividend policy. Dividends are paid out when a company satisfies its internal needs for cash. If a company cuts its dividends stockholders may become worried that the company is not generating enough earnings to satisfy its internal cash needs as well as pay out its current dividend. A stock may decline in this instance.
However, Boeing boosted its quarterly dividend by 51% taking it to 73 cents per share from the previous 48.5 cents payable March 2014.
This is a theoretical approach but historically the price of Boeing has shown a positive correlation with dividends. Therefore, giving more weight to the historical trend and the fact that no material event has occurred that could potentially decrease Boeing's value in the future I can conclude that the dividend increase will have a positive effect on share price movement owing to market forces.
The buyback program was below analysts' expectations. Analysts believed that Boeing would buy a greater amount by 2014. The RBC Capital Markets said that the $10 billion repurchase over two to three years is below the $6.5 billion in repurchases it expected in 2014. Nonetheless, to me it was a convincing move to keep the momentum going. The dividend increase further adds greater returns to Boeing's account. Overall, investors should be happy with Boeing's generosity in sharing earnings. For those who haven't invested in the company, now is the time to do.