|22 January, 2020

Boeing needs MAX insurance more than a dividend

The nearly year-long grounding has resulted in a lot of work without full payment and ballooning inventory on Boeing’s balance sheet

A Boeing logo is seen at the company's facility in Everett after it was announced that their 777X model will make its first test flight later in the week in Everett, Washington, U.S. January 21, 2020.

A Boeing logo is seen at the company's facility in Everett after it was announced that their 777X model will make its first test flight later in the week in Everett, Washington, U.S. January 21, 2020.

Reuters/Lindsey Wasson

NEW YORK - Boeing’s new chief executive, David Calhoun, is tempting fate. He says the $175 billion firm will not cut its $4.6 billion a year dividend. The aircraft maker is burning cash every quarter while its 737 MAX models remain grounded. In a call with reporters on Wednesday, Calhoun also expressed confidence that the planes should resume commercial flights around mid-year. Yet Boeing has repeatedly been too optimistic on when it will get a green light from the U.S. Federal Aviation Administration. Cutting the hefty dividend payout would be prudent.

The nearly year-long grounding has resulted in a lot of work without full payment and ballooning inventory on Boeing’s balance sheet. Debt rose almost 30% in last year’s third quarter alone to about $25 billion. A production halt will help slow the cash bleeding, but it can’t eliminate it. Jefferies estimates the company will go through about $3.5 billion per quarter – including the dividend – while the MAX is grounded.

The longer the MAX jets stand idle, the more difficult the company’s situation may become. The company will have to give customers bigger discounts, and some orders may be cancelled. Key suppliers could need financial help. And credit downgrades won’t help. Fitch on Wednesday revised its outlook on Boeing’s rating to negative because of the possibility of further delays and the company’s substantial debt buildup. The rating firm said borrowing could peak at nearly $34 billion.

Presumably, Calhoun is being more conservative in his timeline than ousted predecessor Dennis Muilenburg. Yet regulators may be more cautious still. The FAA said recently there’s no set time frame. And foreign regulators may want their own say, too.

Boeing has already suspended share repurchases. Eliminating the dividend would be more painful, as many investors count on the yield and others view such a move as an admission of serious financial problems. Yet Boeing’s challenges are hardly a secret.

The company is considering borrowing more, according to the Wall Street Journal earlier this month. Reducing the payout to shareholders would put extra cash on the balance sheet, whether for essential research and development spending or to avoid credit downgrades. Until the 737 MAX is flying again, Boeing needs that kind of insurance more than a dividend.

CONTEXT NEWS

- Boeing’s new chief executive, David Calhoun, said to reporters on Jan. 22 that the firm will not suspend or cut the company’s dividend "unless something dramatic changes." He also said Boeing expects to resume 737 MAX production months before its expected mid-year return to service. The company said in December that it would halt production of the plane in January.

- The U.S. Federal Aviation Administration grounded all MAX planes last March following two crashes that killed 346 people.

- The company is scheduled to report fourth-quarter results on Jan. 29.

(Editing by Richard Beales and Amanda Gomez)

© Reuters News 2020

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