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Recent Sale - Boeing

Why did I buy Boeing in the first place

My position in Boeing originated from a trade made in April 2019 when I decided to sell my shares of Ford (NYSE: F). At the time, I wanted to keep my capital in the industrial sector, and Boeing seemed an attractive buy as the shares just dropped due to the 737MAX catastrophes.

I still think that the trade overall fit my dividend growth strategy since I traded an automobile company that hadn’t (and still hasn’t) raised its dividend since January 2015 for a company with a solid dividend growth rate and reasonable payout ratio for an industrial stock. I believed that buying on bad news would create a unique opportunity to initiate a position in Boeing, a company I believed was too big to fail and had solid future perspectives especially with increasing global air passenger traffic and defense spending.

Reasons for the sale

With the announced dividend cut, the stock doesn’t fit my criteria for a long term dividend growth strategy anymore. The company might still be saved by a government bailout, but this bailout might come with conditions that could prevent the company from reestablishing a dividend in the coming years.

Furthermore, as COVID-19 will have an impact on the aerospace sector for months - if not years - to come, I’m not willing to take on additional risk without being rewarded any kind of cash flow for it. My strategy is focused on an increasing stream of passive cash flow in forms of dividends, distributions, and interest, and Boeing doesn’t fit this strategy anymore.

Lessons Learned

There is no such thing as “too big to fail”. Even a company with a solid future outlook and balance sheet can fail when corporate mismanagements meet natural causes like a global pandemic COVID-19. This is especially true for companies in the considerably cyclical industry sector.

Be cautious of stock buybacks. Boeing spent 74% of its cash flow in the past 10 years on stock buybacks. Tying the executive compensation to the stock price isn’t a good strategy if you want to set up the company for long term success. Short term boosts of the stock price caused by share buybacks are a huge factor for the financial troubles Boeing and the major U.S. airlines are facing. They’re rewarding the board members and executive team for short term strategies while eating away the budget for future success.

Be wary of correlation between companies of the same supply chain in your portfolio. Boeing’s troubles have left their scars on one of their suppliers, Magellan Aerospace Corp. I own and will hold my shares in this company, but the stock price has tanked ever since the grounding of the 737MAX which began the downfall of Boeing.

Disclaimer

I hold long positions in the following stocks mentioned in this article: Magellan Aerospace Corp (TSE: MAL). This article expresses personal opinions and observations of someone who is not licensed to provide financial advice. I am not receiving compensation for writing this analysis and have no business relationship with any company whose stock is mentioned in this article other than the long positions I own. Furthermore, I cannot guarantee the accuracy of the financial metrics gathered from 3rd party services like Morningstar and Yahoo Finance.

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