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Saturday, September 02, 2006

Weekend Edition: Boeing: Not All Stock Buybacks Are Equal

So last night Boeing (BA) went out on the tape and said they would buy back up to $3 Billion worth of common stock in the open market or in negotiated transactions. That is up to 40 million shares at current prices.

Since resuming repurchases in 2004, Boeing has spent about $5 billion buying back its stock.

Boeing this morning opened up about 1% to just under $76.00 and its shares have slid down to a reading of -1.2% at $73.78 mid-day. Buybacks are supposed to be good for shareholders, but sometimes they aren't. So what gives?

In 2004 when the company started repurchasing shares the stock had just started recovering from more than 50% selloff as the US and global airline industry was decimated from 2001 to 2003. This was a great support mechanism to the stock and it was before the massive-sized Dreamliner went into the order phase. The problem we face today is that the company has doubled before the recent pullback and there is a concern about the forward economy. For airlines and aerospace companies, they get extreme readings up and extreme readings down in various parts of the economic cycle. The concern here may be that the company will be extinguishing cash when it could really be using it for a rainy day down the road, so they may not be thought of as keeping their gun powder dry. The stock has been weak and it may need to fall much further before they actually start buying shares with any magnitude that can really buoy the stock.

This is sort of the same action that has occurred when oil companies have announced share buybacks when the shares are close to all-time highs. That is when the street would probably rather see a company make selective acquisitions instead of spending money to keep inflated share prices higher.

This is not without controversy. Some investors love share buybacks more than anything, and some see it merely as a trick to grow EPS and a waste of cash to manage short-term share prices. It doesn't take rocket science to read today's tape and see clearly that the street either thinks the company won't repurchase shares or that they are wasting "rainy day" money if they do. Boeing has already assured itself long steady operations for years into the future with the new Dreamliner orders it has received, but with an impending economic slowdown the street is saying that the company should keep their hands in their pockets.

Jon C. Ogg
August 29, 2006

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