Boeing Co. (IW 500/29) gave investors bad news and good news as it unveiled deeper cuts to one of its biggest money-makers, the 777 jetliner -- and then announced a 30% dividend hike.
The shares responded like a yo-yo in trading after the close in New York, diving on news of the production slowdown for the company’s largest twin-engine model before rebounding a half hour later when the company revealed its dividend of $1.42 a share. That far exceeded the $1.25 average of analysts’ estimates.
Production of the 777 will slow to five aircraft a month starting in August 2017 and some jobs will have to be cut, Boeing told employees Monday. The latest cut comes as Boeing’s suppliers were already girding for a previously announced slowdown to a monthly pace of seven jets at the start of next year. The Chicago-based company currently makes the wide-body planes at an 8.3-jet monthly pace.
The slower factory tempo will mean lower revenue from the 777, Boeing’s second-largest source of profit behind its narrow-body 737. The rate adjustment will have a modest impact on Boeing’s overall results this year, but won’t be significant enough to affect 2016 financial guidance, said Paul Bergman, a spokesman for the company.
Capital Allocation Strategy
Boeing’s decision to reward shareholders, despite a “weakening end market outlook on one of its highest cash margin programs,” could squeeze the company as it juggles a roster of new aircraft, Ron Epstein, an analyst at Bank of American Corp., said in a note to clients Monday.
“While we view returning capital to shareholders as positive, we are concerned that this capital allocation strategy may be short lived as the company grapples with product development on several fronts,” Epstein said.
The manufacturer is already readying the 737 Max program for market debut next year, an update of its best-selling narrow-body plane. It’s also developing the first new 777X aircraft. Epstein said he also expects Boeing “in the near future” to begin marketing the 737 Max 10X, a stretched version of the plane, and possibly a new “7M7,” a nickname for its proposed midsized jet family.
Weaker 777 Demand
Boeing had notched only 17 net orders for the 777 this year, according to its website, well short of the 50 to 60 annual sales it needed to keep its assembly line in Everett, Wash., operating at full speed until a revamped version of the jet debuts in 2020.
Demand for twin-aisle jets has been sapped by a glut of used Boeing 777 and Airbus Group SE A330 models. Cheap oil and economic turmoil give airlines less incentive to trade in middle-aged models for pricey new fuel-efficient ones.
“Market demand drives production rates both to the upside and the downside. And the market is signaling near-term hesitation in some regions,” Elizabeth Lund, a Boeing vice president and general manager of the 777 program, said in a message Monday to factory employees.
The new agreement with Iran Air for 15 777-300ERs and 15 777Xs, announced Sunday, wasn’t sufficient to avoid the production cut that Boeing executives had signaled was coming. The Iranian flag carrier is due to take its first 777-300ER in 2018, Lund said.
Boeing’s board also authorized $14 billion in share buybacks, replacing a previous program of the same size. The company said it had repurchased $7 billion of its shares this year.
By Julie Johnsson