Boeing Retains Borderline Safe Dividend Safety Score After Production Halt, Dividend Freeze

Boeing (BA) said Monday it would temporarily suspend production of its grounded 737 MAX beginning in January. Many investors had anticipated this news, as demonstrated by Boeing's relatively muted stock price reaction (shares are down about 4% since Friday's close).

As you may recall, the 737 MAX is Boeing's best-selling plane model (expected to account for about 40% of total profits) and has been grounded since March 2019 following two deadly crashes. Earlier this year Boeing had already reduced its planned production rate of 737 aircraft.

Boeing's close relationship with the U.S. Federal Aviation Administration (FAA) has been heavily scrutinized in recent months, especially as Boeing has tried to up the pressure on the FAA to return the 737 MAX to service as soon as possible.

On November 11, Boeing released its own expected schedule, stating it was "possible that the resumption of MAX deliveries to airline customers could begin in December."

Later that month the FAA flexed its authority, trying to make it clear to the public that it alone controls the timing of certification and return to commercial service.

The FAA is now probing Boeing's 737 MAX production and said approval is unlikely until January at the earliest, driving management's decision to halt production as Boeing awaits more timing clarity.

Temporarily suspending production will help Boeing preserve working capital since it will no longer be pouring money into making and storing jets that it can't get paid for until deliveries to customers resume.

Jefferies analyst Sheila Kahyaoglu estimates Boeing's production halt will halve the $4.4 billion in cash the company has burned through each quarter, according to The Wall Street Journal. Boeing's future costs will inflate as it spreads higher fixed costs over fewer planes, but the firm's liquidity should be better preserved thanks to this action.
Source: Boeing Earnings Presentation

As a result, Boeing maintained its $5 billion annual dividend commitment. This marks the first time since 2011 that the planemaker has not raised its annual dividend, but a freeze seems like the prudent action to take.

After all, we downgraded Boeing's Dividend Safety Score in October 2019 due to concerns about a prolonged return-to-service delay straining the company's financial flexibility:

"With return-to-service timing becoming murkier, potentially adding billions of dollars of costs, we are downgrading Boeing's Dividend Safety Score to Borderline Safe until more clarity is provided by regulators.

The firm's liquidity seems adequate to handle a delay of several months, but it's less clear how Boeing might respond to a prolonged delay, not to mention the potential for any order cancellations or rejections by disgruntled customers."

Each passing month that the 737 MAX is not cleared for flight adds to the uncertainty surrounding Boeing's financial outlook. If the plane's grounding order has not been lifted by the spring of 2020 or any other material setbacks emerge, Boeing's Dividend Safety Score could be downgraded again.

Southwest and American Airlines have already canceled 737 MAX flights into part of April, and Boeing faces an uphill battle restoring trust with its airline customers and the general public. Its MAX order backlog remains stable for now, but it's unclear how long strained airlines are willing to wait for their planes.

Overall, Boeing is on a short leash. It's possible that all of this is behind the company by the end of next year. That's what the market seems to be expecting. But there's a lingering concern that Boeing's troubles run deeper and could prevent regulators from approving a timely return to service, resulting in greater short-term pain and pressure on the dividend.

Boeing will provide financial information related to its production suspension when it releases earnings in late January. We should know a lot more by the end of the first quarter and will provide updates as necessary.

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