By Philip van Doorn, MarketWatch
Many investors didn’t trust airline stocks through the bull market. Their valuation to earnings ratios were low, even as profits rose dramatically.
But despite a history of rough patches during unforeseen events, such as the Sept. 11, 2001, attacks and the volcanic eruption in Iceland in 2010 that disrupted air travel, large U.S. airline companies spent most of their free cash flow over the past 10 years on share buybacks, propping up their quarterly earnings-per-share results.
So did aerospace giant Boeing /zigman2/quotes/208579720/composite BA -2.65% , but to a lesser extent.
Free-cash-flow and stock-buyback data for six large airline companies and Boeing are shown below.
Airlines have a long history of bankruptcies, and there is a very long of list of Chapter 7 and Chapter 11 filings , including TWA in 2001 and Eastern in 1991.
Now, large U.S. airlines and Boeing have requested massive aid from the federal government. Talks are ongoing, but President Trump said Tuesday that “we have to protect Boeing,” which is the largest U.S. exporter.
Boeing said March 17 that “ a minimum of $60 billion in access to public and private liquidity, including loan guarantees ” was appropriate for the aerospace-manufacturing industry.
Bailouts may be necessary, and it remains to be seen what form they may take.
Free cash flow and buybacks
Most investors know that cash flow is more important than earnings, because revenue can be booked, and profits shown, before a company actually receives payment. A company’s free cash flow is its remaining cash flow after planned capital expenditures. Free cash flow can be used to pay for dividends, buy back shares, expand operations or invest in other improvements for the business.
Companies that built up hoards of cash, such as Berkshire Hathaway /zigman2/quotes/200060694/composite BRK.B +0.26% , have been criticized for doing so, because it lowers a company’s return on invested capital.
Then again, Berkshire CEO Warren Buffett has shown during down markets that the extra cash can be put to work by scooping up other companies’ shares at low prices, or making special, lucrative preferred-stock deals, such as the one Berkshire did with Goldman Sachs /zigman2/quotes/209237603/composite GS -1.74% during the 2008 financial crisis. Berkshire had $125 billion in cash and short-term investments in U.S. Treasury bills as of Dec. 31.