.png)
Coronavirus, 737 MAX Delay Increase Pressure on Boeing's Dividend
Boeing's (BA) timeline for returning its best-selling 737 MAX plans to commercial service likely took another hit this week, as the Federal Aviation Administration is expected to order certain electrical wires relocated inside the jets, according to the Wall Street Journal.
Meanwhile, the coronavirus is weighing on travel demand and the financial health of Boeing's airline customers. Not only is this bad for new plane orders, but it could pressure the ability of some customers to make advanced payments to support production of their jets that are under construction.
Given Boeing's increasingly fragile state and the rising uncertainty facing the company, we are downgrading the company's Dividend Safety Score from Borderline Safe to Unsafe.
We also plan to exit our Boeing position today in our Top 20 Dividend Stocks portfolio. We bought our shares in July 2015 at a price of $144.48 per share and trimmed our position by a third in February 2018 at $342.30 after our position reached an uncomfortably large weight (about 8% of our portfolio).
Our investment worked out well overall, but I am usually reluctant to sell our winners as long as their long-term outlooks and dividends remain intact. In this case, though, Boeing's short-term challenges could pressure its dividend.
In October 2019, we first downgraded Boeing's Dividend Safety Score to Borderline Safe due to concerns about a prolonged return-to-service delay straining the company's financial flexibility since it could not collect payments for completed planes.
Then, in January 2020, we wrote:
Meanwhile, the coronavirus is weighing on travel demand and the financial health of Boeing's airline customers. Not only is this bad for new plane orders, but it could pressure the ability of some customers to make advanced payments to support production of their jets that are under construction.
Given Boeing's increasingly fragile state and the rising uncertainty facing the company, we are downgrading the company's Dividend Safety Score from Borderline Safe to Unsafe.
We also plan to exit our Boeing position today in our Top 20 Dividend Stocks portfolio. We bought our shares in July 2015 at a price of $144.48 per share and trimmed our position by a third in February 2018 at $342.30 after our position reached an uncomfortably large weight (about 8% of our portfolio).
Our investment worked out well overall, but I am usually reluctant to sell our winners as long as their long-term outlooks and dividends remain intact. In this case, though, Boeing's short-term challenges could pressure its dividend.
In October 2019, we first downgraded Boeing's Dividend Safety Score to Borderline Safe due to concerns about a prolonged return-to-service delay straining the company's financial flexibility since it could not collect payments for completed planes.
Then, in January 2020, we wrote:
So long as the latest [return-to-service] timeline stands, Boeing's dividend seems likely to remain steady, especially since the issues behind the latest delay (e.g. more pilot training) don't appear serious or likely to threaten the 737 MAX program's viability.
Talk is cheap, but it would be surprising for the new CEO to backtrack on his comments [to not suspend the dividend] barring another material setback. It's just increasingly critical that the company and regulators finally meet expectations this time...
While the MAX crisis does not appear to be an existential threat to Boeing (thanks in part to the firm's duopoly with Airbus), it has dealt a blow to Boeing's balance sheet, long-term profitability, dividend growth outlook, and overall reputation... Boeing is on a very short leash in our Top 20 Dividend Stocks portfolio.
The coronavirus outbreak and new wiring issue with the 737 MAX could be enough for Boeing to hunker down and considering temporarily reducing or suspending its dividend until visibility improves.
In January the firm's new CEO ruled out the possibility of a dividend reduction "unless something dramatic changes." But we could be nearing that point now.
After all, earlier today Bloomberg reported that Boeing plans to draw down the full loan amount it received from a group of banks last month as it continues burning through cash until the 737 MAX returns to service.
Bloomberg's article stated that Boeing took this action as a precaution "due to market turmoil", but stress builds with every passing month that the 737 MAX remains grounded and airlines become more financially challenged with weak air traffic trends due to coronavirus fears.
We still think Boeing will survive these issues due to the large commercial aircraft market's duopoly structure and long-term growth in air traffic, but the firm's dividend is traveling on increasingly thin ice.
Due to this concern, we will watch from the sidelines for now and begin looking for replacement ideas in our Top 20 Dividend Stocks portfolio.
