Weight, speed, fuel, distance
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.