Karma comes for Boeing’s shareholders

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This is what karma looks like for Boeing shareholders. The aircraft maker has become the emblem of American capitalism gone rogue: for a generation, it prioritised tens of billions of dollars in share buybacks and other financial engineering over operational excellence.

On Monday, Boeing said it would sell as much as $21bn of equity, which it needs to stay afloat as slashed plane deliveries have sent cash flow into the red. The offering includes both common equity and preferred stock convertible into common shares. Pricing details will not be disclosed — including likely the slight share conversion premium that preferred stockholders will pay in exchange for a preferred dividend — until the financings close in the coming days. 

But based on the current Boeing stock price, participants in the capital raising will own roughly a fifth of Boeing’s outstanding shares. The money will go to pay off pending debt maturities and fund another year of cash burn while maintaining Boeing’s investment grade credit rating. The company has gone big and has told those shareholders who got fat during all of those buyback years that they must now take the pain of heavy dilution.

The so-called mandatory convertible preferred stock accounts for about a quarter of the pending equity offering. The preferred stock accrues a dividend — but one that can sometimes be paid off later in stock — and will turn into equity in October 2027.

How many shares go to holders of the convertible note typically depends on how the issuer’s stock price performs, with more shares issued the more poorly the underlying stock performs. The downside protection is in the form of the dividend; often mandatory convertibles are the lure needed to pull in investors to the bigger common equity offering. The good news is that rating agencies treat the convertible as if it were 100 per cent equity.

Boeing’s share price of roughly $150 is still much higher than where it traded in 2022 during a broader market rout and the peak uncertainty around its 737 Max programme. Today, Boeing says it has a backlog of more than 5,400 jets worth more than $500bn, which should give a clear sightline of revenue.

But Boeing’s persistent problem is that it stumbles in reliably delivering contracted orders on time and on budget, which in turn imperils shareholder returns. This very well could be the last time Boeing is compelled to sell equity. But that depends on it finally capitalising on its financial lifeline to deliver operationally.

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