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"According to Boeing’s annual reports, in the last five years Boeing diverted 92% of operating cash flow to dividends and share buybacks to benefit investors. S

by pcurve 7y ago

"According to Boeing’s annual reports, in the last five years Boeing diverted 92% of operating cash flow to dividends and share buybacks to benefit investors. Since 1998, share buybacks have consumed $70 billion, adjusted for inflation. That could have financed several entire new airplane models, with money left over for handsome executive bonuses." So many punchlines, but this one is is just sad. 92%.

JMTQp8lwXL 7y ago
Excessive buybacks are bound to doom companies. If you can't compete, if you can't innovate, if your destroy your brand's reputation in order to maximize share buybacks, you will no longer have the revenue to continue the buybacks. Like most things, a happy medium is good. Too few buybacks, you might be wasteful in your R&D spending. Too much, you get a Boeing situation. A middle ground optimizes for continuing to produce innovations, while maintaining (and hopefully growing) revenues.
- JMTQp8lwXL 7y ago
  In the case of Boeing, it might be challenging to know how much you can cut costs before you materially impact the business. What exactly is essential? I'm certainly no expert in the aeronautical, but who really knows if trimming two sensors down to one has a good ROI? As an engineer, I typically know that redundancy is a good thing. But maybe their historical data showed that those sensors have very, very low chance of failing. Maybe they've never previously even encountered the situation where the second was remotely necessary. They could've backtested the impact of removing the sensor, and found no concerns. We could assume a more ominous intent here, but with Boeing's reputation on the line, I doubt they would've actually been interested in cutting costs at the expense of lives -- we can see the impact that had today on their reputation. Many little cost-cutting decisions are made, and many are probably likely to be inconsequential. It's easy for us to say, "obviously cutting 2 sensors to 1" was the wrong choice. But you could make the same argument for any other cost-cutting measure they employed, that had no safety impact. The difference here, is unfortunately this one brought a huge public eye on Boeing. It's good to cut costs (where reasonably possible), and it's good to return value to shareholders. Those are things expected of public companies. They probably compared themselves to their peers, realized that stock buybacks is the current metric to which public companies are being measured by, and over-optimized for it. A lot of people look at their peers to decide what to do themselves, even multi-national companies. This time, it didn't pan out.
- jonahhorowitz 7y ago
  Before the 1980s, buybacks were illegal and seen as stock manipulation. We should get back to that. If you can't find a good use for the money, pay dividends.
  - pcurve 7y ago
    I wonder what the short term and long term consequences of the buyback ban might be. It could probably an interesting debate topic over drinks that could go on for hours ;-) Short term, it will probably lead to equity market tanking, especially if it is not coordinated with the rest of the world capital market. I guess I'm more interested in long term impact on how companies operate, compensates executives, manages assets. Dividend will still be allowed.
  - TimTheTinker 7y ago
    I strongly agree. I wonder if it would help for a new kind of union to arise - one that exists only to guarantee good wages for its members -- to force companies to direct more profits toward wages instead of towards stock buybacks.
Spooky23 7y ago
Sounds like that big innovator IBM.
troydavis 7y ago
Matt Levine has some food for thought on buybacks: https://www.bloomberg.com/opinion/articles/2019-06-24/would-corporate-america-be-better-without-stock-buybacks https://www.bloomberg.com/opinion/articles/2019-06-24/would-... To summarize his article: if you take issue with anything, take issue with the profitability and lack of reinvestment. Don't blame buybacks and dividends because in general, they're an outcome. As Levine says: "But in this story the buybacks are the residual, a result of a focus on profits rather than a cause."
- pcurve 7y ago
  "take issue with the profitability and lack of reinvestment" The problem is lack of re-investment. 92% of Operating cash flow of being plowed into repurchase and dividend is high even more mature company like Boeing.
AnimalMuppet 7y ago
What's the difference between "operating cash flow" and "profit"? Is it "operating profit", that is, without investing in R&D or capital expenditures? "Consumed" is kind of a loaded word. It's true that money spent that way can't be invested in capital improvements or R&D. But "consumed" kind of implies "wasted". That's hard to say without knowing what a normal number for an airplane manufacturer is. And, of course, money spent on "handsome executive bonuses" would also have drawn ire...
taurath 7y ago
Its insanity to me that investors are that important within corporate charters. Not the people it employs, not the community it operates in, not the value it brings to society, not even the amount of money it makes. The returns to investors is 99.9% the reason a corporation exists. Its institutionalized sociopathy, and I'm pretty certain it wasn't always this way (or at least as widespread).

by pcurve 7y ago

JMTQp8lwXL 7y ago

Excessive buybacks are bound to doom companies. If you can't compete, if you can't innovate, if your destroy your brand's reputation in order to maximize share buybacks, you will no longer have the revenue to continue the buybacks. Like most things, a happy medium is good. Too few buybacks, you might be wasteful in your R&D spending. Too much, you get a Boeing situation. A middle ground optimizes for continuing to produce innovations, while maintaining (and hopefully growing) revenues.

JMTQp8lwXL 7y ago
In the case of Boeing, it might be challenging to know how much you can cut costs before you materially impact the business. What exactly is essential? I'm certainly no expert in the aeronautical, but who really knows if trimming two sensors down to one has a good ROI? As an engineer, I typically know that redundancy is a good thing. But maybe their historical data showed that those sensors have very, very low chance of failing. Maybe they've never previously even encountered the situation where the second was remotely necessary. They could've backtested the impact of removing the sensor, and found no concerns. We could assume a more ominous intent here, but with Boeing's reputation on the line, I doubt they would've actually been interested in cutting costs at the expense of lives -- we can see the impact that had today on their reputation. Many little cost-cutting decisions are made, and many are probably likely to be inconsequential. It's easy for us to say, "obviously cutting 2 sensors to 1" was the wrong choice. But you could make the same argument for any other cost-cutting measure they employed, that had no safety impact. The difference here, is unfortunately this one brought a huge public eye on Boeing. It's good to cut costs (where reasonably possible), and it's good to return value to shareholders. Those are things expected of public companies. They probably compared themselves to their peers, realized that stock buybacks is the current metric to which public companies are being measured by, and over-optimized for it. A lot of people look at their peers to decide what to do themselves, even multi-national companies. This time, it didn't pan out.
jonahhorowitz 7y ago
Before the 1980s, buybacks were illegal and seen as stock manipulation. We should get back to that. If you can't find a good use for the money, pay dividends.
- pcurve 7y ago
  I wonder what the short term and long term consequences of the buyback ban might be. It could probably an interesting debate topic over drinks that could go on for hours ;-) Short term, it will probably lead to equity market tanking, especially if it is not coordinated with the rest of the world capital market. I guess I'm more interested in long term impact on how companies operate, compensates executives, manages assets. Dividend will still be allowed.
- TimTheTinker 7y ago
  I strongly agree. I wonder if it would help for a new kind of union to arise - one that exists only to guarantee good wages for its members -- to force companies to direct more profits toward wages instead of towards stock buybacks.

Spooky23 7y ago

Sounds like that big innovator IBM.

troydavis 7y ago

Matt Levine has some food for thought on buybacks: https://www.bloomberg.com/opinion/articles/2019-06-24/would-corporate-america-be-better-without-stock-buybacks https://www.bloomberg.com/opinion/articles/2019-06-24/would-... To summarize his article: if you take issue with anything, take issue with the profitability and lack of reinvestment. Don't blame buybacks and dividends because in general, they're an outcome. As Levine says: "But in this story the buybacks are the residual, a result of a focus on profits rather than a cause."

pcurve 7y ago
"take issue with the profitability and lack of reinvestment" The problem is lack of re-investment. 92% of Operating cash flow of being plowed into repurchase and dividend is high even more mature company like Boeing.

AnimalMuppet 7y ago

What's the difference between "operating cash flow" and "profit"? Is it "operating profit", that is, without investing in R&D or capital expenditures? "Consumed" is kind of a loaded word. It's true that money spent that way can't be invested in capital improvements or R&D. But "consumed" kind of implies "wasted". That's hard to say without knowing what a normal number for an airplane manufacturer is. And, of course, money spent on "handsome executive bonuses" would also have drawn ire...

taurath 7y ago

Its insanity to me that investors are that important within corporate charters. Not the people it employs, not the community it operates in, not the value it brings to society, not even the amount of money it makes. The returns to investors is 99.9% the reason a corporation exists. Its institutionalized sociopathy, and I'm pretty certain it wasn't always this way (or at least as widespread).