At the end of 2016, Boeing’s (BA) pension plan was underfunded by $20 billion. General Electric (GE), with a plan underfunded by $31.1 billion, is the only company worse off than Boeing. This status is a drastic turn of events—Boeing’s pension plan was overfunded by $4.7 billion until 2008.
Two things played a key role in this turn of events. The first was Boeing’s possibly unrealistic pension assumptions. The second was Boeing choosing to buy back stock instead of contributing to its pension plan. In the past three years, Boeing has bought back stock worth $30 billion in an effort to boost stock prices, which it has achieved. Boeing stock has risen~103.4% in the last three years.
Uses stock to fund pension plan
Boeing’s underfunded status is not the only bad news for its investors and employees. Boeing is now using its own stock, which is at an all-time high, to fund its plan. In 3Q17, Boeing transferred shares worth almost $3.5 billion to its pension plan assets, including shares bought back at previous low prices. This transfer, along with a $1.5 billion cash contribution, still leaves Boeing’s pension plan underfunded by $15 billion.
Boeing seems to be hoping that its stock rally continues in the future, which is uncertain. If its stock price does rise, Boeing will be able to forego contributions for the next four years. On the other hand, if Boeing’s stock price falls, its pension plan will be hit twice as hard.
General Electric’s pension plan
Like Boeing, GE has used its own stock to fund its pension plan. GE stock has fallen significantly this year, by 22.5%, due to slowing business and dividend cuts. In addition to the value of plan assets falling, GE’s loss of business will make it incapable of making any meaningful contributions to its pension plan. Of course, GE’s stock contribution of $700 million was smaller than Boeing’s massive $3.5 billion contribution.
Ideally, Boeing should aim to diversify its plan assets so that their value does not fall while its business is in turmoil. Boeing is the Dow Jones Industrial Average ETF’s (DIA) third-largest holding, with a ~6% allocation. DIA also has a 3.9% exposure to United Technologies (UTX).