Boeing uses shares to cut pension deficit

Like so many companies in America, Boeing Co. has largely neglected the gaping deficit in its employee pension as it doled out rewards to shareholders.

What’s drawing attention is how it plans to shore up the retirement plan.

Last month, Boeing made its largest pension contribution in over a decade. But rather than put up cash and lock in the funding, the planemaker transferred $3.5 billion of its own shares, including those it bought back in years past. (The administrator says it expects to sell them over the coming year.)

The move was cheered by many on Wall Street. Yet to pension experts, it isn’t worth the risk. After a record-setting 58 percent rally this year, Boeing is betting it can keep producing the kind of earnings that push shares higher. If all goes well, not only will the pension benefit, but Boeing said it will be able to forgo contributions for the next four years.

But if anything goes awry, the $57 billion pension — which covers a majority of its workers and retirees — could easily end up worse off than before.

“It’s an irresponsible thing to do certainly from the perspective of the plan participants,” said Daniel Bergstresser, a finance professor at the Brandeis International Business School. “Ideally, you would like to put assets in the pension plan that won’t fall in value at exactly the same time that the company is suffering.”

Under Chief Executive Officer Dennis Muilenburg, Boeing’s pension shortfall has widened as the Chicago-based company stepped up share buybacks. The $20 billion gap is now wider than any S&P 500 company except General Electric Co. And relative to earnings, Boeing shares are already trading close to the highest levels in a decade, a sign there might be more downside than upside.

Boeing disagrees and sees the strategy as a win-win.

“We continue to see Boeing stock as a good value,” spokesman Chaz Bickers said. “This action further reduces risk to our business while increasing the funding level of our pension plans. Our employees and retirees benefit as well, since this action provides funding earlier, giving the plan sponsor more flexibility to grow the plans’ assets.”

It’s too early to tell how things will play out — especially for a company whose shares have historically been sensitive to the ups and downs of the economy — and early returns are mixed. Gains have slowed markedly since Boeing transferred 14.4 million shares to its pension on Aug. 1, but the 2.4 percent advance is still more than the S&P 500. (The plan has the option to dispose of the shares at any time.)

Analysts see Boeing climbing to $262.86 a share in the coming year, supported by a near-record $423 billion backlog of jet orders that’s equal to about seven years of factory output. That would be good for a 7.2 percent gain from Thursday’s price of $245.23, and roughly in line with analysts’ estimates for the broader market. In the previous 12 months, Boeing stock nearly doubled.

Of course, Boeing isn’t the only company to opt for stock instead of cash when it comes to its pensions. GE’s plan holds more than $700 million of shares and IBM had about $28 million of stock in its U.S. pensions. But Boeing’s transfer is notable because it was one of the largest in recent memory and happened just one day after the company’s shares reached an all-time high.

Pension experts and academics have long debated how much company stock is too much for retirement plans, particularly because workers’ livelihoods become even more intertwined with their employer’s fortunes when they own shares.

With pensions like Boeing’s, the risks to the company can be greater when share prices plunge because employers are on the hook to cover any shortfall. And for Boeing, the deficit is already considerable.

“It would have been a cleaner decision to contribute cash to the pension,” said Vitali Kalesnik, the head of equity research at Research Affiliates. “Boeing to a degree is a very cyclical company.”

Business on 09/16/2017

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