Boeing Cuts 777 Production; Iran Says Company to Finance First 6 Planes

After markets closed on Monday, Boeing Co. (NYSE: BA) announced that it will raise its dividend by 30% and renew its share repurchase program with a $14 billion authorization. The company also said it will cut production of its current model 777 from seven per month to five beginning in August 2017.

While the dividend hike and share buyback are good news for investors, the production cut to the 777 is less good. It almost certainly means that layoffs will occur, although Boeing did not indicate how many jobs, if any, would be lost.

Then early Tuesday morning, Reuters reported that Farhad Parvaresh, CEO of Iran’s flag carrier Iran Air, announced that Boeing will finance the purchase of the first six airplanes in the deal announced Sunday for 80 new Boeing aircraft. According to the report, Parvaresh said the airline will pay 15% of the cost for the new planes from the country’s development fund.

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There are a number of things happening here. First, Boeing is finally admitting that it cannot maintain 777 production at levels that it has for two years insisted were possible. The actual delivery rate of the planes is likely to be 3.5 planes per month, according to Leeham News. The remaining slots on the production line will be “blanks,” the term the company has used to identify gaps in the line that will be filled by Boeing’s transition to the new 777X.

Second, a slowdown in deliveries of the 777 also affects Boeing’s cash flow. There are large and varied demands on Boeing’s cash, and adding a dividend hike and a new buyback program only intensifies those demands. Leeham News cited a note from analysts at Goldman Sachs, a long-time Boeing bear:

The $1.42 quarterly dividend creates a 3.6% yield. Taking the buyback authority back to $14bn implies a plan to sustain the current repurchase pace. However, BA is now slated to payout 180% of our 2017E net income estimate to dividend + buyback; which is not sustainable without increasing net leverage eventually.

Third, if the Reuters report is accurate, Boeing may be shooting itself in the foot. The company has long argued that the U.S. Export-Import Bank is critical to its competitiveness with Airbus and other manufacturers. While the Ex-Im bank is forbidden by law from helping Boeing finance sales to Iran, the bank’s opponents are sure to point to the company’s willingness to finance these sales as a signal that Boeing does not in fact need to rely on the bank.

Analysts at Morgan Stanley, also cited by Leeham News, are more upbeat. They rate the stock as Overweight and raised their price target from $155 to $185, saying they believe the “shares have the potential to rerate higher and possibly trade at more comparable levels to peers on a [free cash flow] basis and in the $175 to $200 per share range (or ~25% above current levels).”

Shareholders apparently like what they heard. Boeing’s shares traded up 1.8% in Tuesday’s premarket to $159.99, after posting a new 52-week high of $158.00 on Monday. The 52-week low is $102.10, and the consensus price target is $153.56.

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