Like so many companies in America, Boeing Co. has largely neglected the gaping deficit in its employee pension as it doled out lavish rewards to shareholders.
What’s raising eyebrows is how it plans to shore up the retirement plan.
Last month, Boeing made its largest pension contribution in over a decade. But rather than put up cash and lock in the funding, the planemaker transferred $3.5 billion of its own shares, including those it bought back in years past. (The administrator says it expects to sell them over the coming year.)
It’s a bold move, and one cheered by many on Wall Street. Yet to pension experts, it isn’t worth the risk. After a record-setting, 58% rally this year, Boeing is betting it can keep producing the kind of earnings that push shares higher. If all goes well, not only will the pension benefit, but Boeing says it will be able to forgo contributions for the next four years.
But if anything goes awry, the $57 billion pension -- which covers a majority of its workers and retirees -- could easily end up worse off than before.
“It’s an irresponsible thing to do certainly from the perspective of the plan participants,” said Daniel Bergstresser, a finance professor at the Brandeis International Business School. “Ideally, you would like to put assets in the pension plan that won’t fall in value at exactly the same time that the company is suffering.”
Under COE Dennis Muilenburg, Boeing’s pension shortfall has widened as the Chicago-based company stepped up share buybacks. The $20 billion gap is now wider than any S&P 500 company except General Electric Co. And relative to earnings, Boeing shares are already trading close to the highest levels in a decade, a sign there might be more downside than upside.
Boeing disagrees and sees the strategy as a win-win.
“We continue to see Boeing stock as a good value,” spokesman Chaz Bickers said. “This action further reduces risk to our business while increasing the funding level of our pension plans. Our employees and retirees benefit as well since this action provides funding earlier, giving the plan sponsor more flexibility to grow the plans’ assets.”
It’s too early to tell how things will play out -- especially for a company whose shares have historically been sensitive to the ups and downs of the economy -- and early returns are mixed. Gains have slowed markedly since Boeing transferred 14.4 million shares to its pension on Aug. 1, but the 2.4% advance is still more than the S&P 500. (The plan has the option to dispose of the shares at any time.)
Analysts see Boeing climbing to $262.86 a share in the coming year, supported by a near-record $423 billion backlog of jet orders that’s equal to about seven years of factory output. That would be good for a 7.2% gain from stock price on Sept. 14 of $245.23, and roughly in line with analysts’ estimates for the broader market. In the previous 12 months, Boeing stock nearly doubled.
Of course, Boeing isn’t the only company to opt for stock instead of cash when it comes to its pensions. GE’s plan holds more than $700 million of shares and IBM had about $28 million of stock in its U.S. pensions. But Boeing’s transfer is notable because it was one of the largest in recent memory and happened just one day after the company’s shares reached an all-time high.
Pension experts and academics have long debated how much company stock is too much for retirement plans, particularly because workers’ livelihoods become even more intertwined with their employer’s fortunes when they own shares. The dangers came into full view when Enron’s collapse a decade ago saddled its employees with millions of worthless shares in their 401(k)s.
With pensions like Boeing’s, the risks to the company can be greater when share prices plunge because employers are on the hook to cover any shortfall. And for Boeing, the deficit is already considerable.
“It would have been a cleaner decision to contribute cash to the pension,” said Vitali Kalesnik, the head of equity research at Research Affiliates. “Boeing to a degree is a very cyclical company.”
Boeing’s pension went deep into the red after the global financial crisis in 2008 hurt aircraft sales, while delays in its 787 Dreamliner program burned up cash. Record-low interest rates in the years since hurt pension returns across corporate America, and made it hard for Boeing to claw its way out.
At the end of 2016, its pension had $57 billion in assets and $77 billion in obligations -- a funding ratio of 74%, data compiled by Bloomberg show.
Boeing froze pensions for Seattle-area Machinist union members last year under a hard-fought contract amendment. It also switched non-union workers to a defined contribution plan.
And the stock transfer last month, combined with a planned $500 million cash payment this year, would be equal to all the company’s contributions during the previous five years. Nevertheless, it still leaves Boeing with roughly $15 billion in unfunded pension liabilities, although the shortfall should gradually shrink over the next four years, according to Sanford C. Bernstein & Co.
To be clear, Boeing has the money. In the past three years, the company generated enough excess cash to buy back $30 billion of its own shares.
But using equity instead of cash does have its advantages. It allows Boeing to conserve its free cash flow -- a key metric for investors -- by transferring Treasury shares that were repurchased at far lower values than today’s prices. In addition, Boeing will get a $700 million tax benefit, which will offset the cost of its $500 million cash contribution.
The strategy shows how Boeing can “look at risk differently, be proactive and manage that today, and take that uncertainty out over the next five years,” Greg Smith, Boeing’s chief financial officer and chief strategist, told an investor conference on Aug. 9.
It’s not the first time Boeing has plowed stock into its underfunded pension. In 2009, the company contributed $1.5 billion. The shares jumped 27% that year and 21% in 2010. By 2011, the plan had cashed out.
But this time, Boeing’s valuation is much higher. With a price-earnings ratio of 23, the stock is more than three times as pricey as it was at the start of 2009. Given the nature of Boeing’s business, its earnings could be vulnerable to geopolitical shocks or an economic slowdown that saps demand for air travel.
What’s more, the longer its pension remains under water, the more expensive it becomes to maintain. The Pension Benefit Guaranty Corp., a government agency that acts as a backstop when plans fail, has tripled its rates for companies with funding deficits, and more increases are on the way.
There’s a limit to how long Boeing can put off underfunded liabilities. Over the next decade, the company expects to pay out about $46 billion to retirees.
By Katherine Chiglinsky, Julie Johnsson and Brandon Kochkodin