Like so many companies in America, Boeing Co. has largelyneglected the gaping deficit in its employee pension as it doledout lavish rewards to shareholders.

What's raising eyebrows is how it plans to shore up theretirement plan.

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

It's a bold move, and one cheered by many on Wall Street. Yet topension experts, it isn't worth the risk. After a record-setting58% rally this year, Boeing is betting it can keep producing thekind of earnings that push shares higher. If all goes well, notonly will the pension benefit, but Boeing says it will be able toforgo contributions for the next four years.

But if anything goes awry, the $57 billion pension, which coversa majority of the company's workers and retirees, could easily endup worse off than before.

“It's an irresponsible thing to do certainly from theperspective of the plan participants,” said Daniel Bergstresser, afinance professor at the Brandeis International Business School.“Ideally, you would like to put assets in the pension plan thatwon't fall in value at exactly the same time that the company issuffering.”

Under CEO Dennis Muilenburg, Boeing's pension shortfall haswidened as the company stepped up share buybacks. The $20 billiongap is now wider than that of any S&P 500 company exceptGeneral Electric. And relative to earnings, Boeing shares arealready trading close to the highest levels in a decade, a signthere 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,” spokesmanChaz Bickers said. “This action further reduces risk to ourbusiness while increasing the funding level of our pension plans.Our employees and retirees benefit as well since this actionprovides funding earlier, giving the plan sponsor more flexibilityto grow the plans' assets.”

It's too early to tell how things will play out—especially for acompany whose shares have historically been sensitive to the upsand downs of the economy—and early returns are mixed. Gains haveslowed markedly since Boeing transferred 14.4 million shares to itspension on Aug. 1, but the 2.4% advance is still more than theS&P 500. (The plan has the option to dispose of the shares atany time.)

Analysts see Boeing climbing to $262.86 a share in the comingyear, supported by a near-record $423 billion backlog of jet ordersthat's equal to about seven years of factory output. That would begood for a 7.2% gain from Thursday's price of $245.23, and roughlyin line with analysts' estimates for the broader market. In theprevious 12 months, Boeing stock nearly doubled.

Price Targets

Of course, Boeing isn't the only company to opt for stockinstead of cash when it comes to its pensions. GE's plan holds morethan $700 million of shares and IBM had about $28 million ofstock in its U.S. pensions. But Boeing's transfer is notablebecause it was one of the largest in recent memory and happenedjust one day after the company's shares reached an all-timehigh.

Pension experts and academics have long debated how much companystock is too much for retirement plans, particularlybecause workers' livelihoods become even more intertwined withtheir employer's fortunes when they own shares. The dangers cameinto full view when Enron's collapse a decade ago saddled itsemployees with millions of worthless shares in their 401(k)s.

With pensions like Boeing's, the risks to the company can begreater when share prices plunge because employers are on the hookto cover any shortfall. And for Boeing, the deficit is alreadyconsiderable.

“It would have been a cleaner decision to contribute cash to thepension,” said Vitali Kalesnik, the head of equity research atResearch Affiliates. “Boeing to a degree is a very cyclicalcompany.”

Boeing's pension went deep into the red after the globalfinancial crisis in 2008 hurt aircraft sales, while delays in its787 Dreamliner program burned up cash. Record-low interest rates inthe years since hurt pension returns across corporate America, andmade it hard for Boeing to claw its way out.

Pension Freeze

At the end of 2016, its pension had $57 billion in assets and$77 billion in obligations—a funding ratio of 74%, data compiled byBloomberg show.

Boeing froze pensions for Seattle-area Machinist union memberslast year under a hard-fought contract amendment. It also switchednon-union workers to a defined-contribution plan.

And the stock transfer last month, combined with a planned $500million cash payment this year, would be equal to all the company'scontributions during the previous five years. Nevertheless, itstill leaves Boeing with roughly $15 billion in unfunded pensionliabilities, although the shortfall should gradually shrink overthe next four years, according to Sanford C. Bernstein &Co.

To be clear, Boeing has the money. In the past three years, thecompany generated enough excess cash to buy back $30 billion of itsown shares.

But using equity instead of cash does have its advantages. Itallows Boeing to conserve its free cash flow—a key metric forinvestors—by transferring Treasury shares that were repurchased atfar lower values than today's prices. In addition, Boeing will geta $700 million tax benefit, which will offset the cost of its $500million cash contribution.

Risk Strategy

The strategy shows how Boeing can “look at risk differently, beproactive and manage that today, and take that uncertainty out overthe next five years,” Greg Smith, Boeing's CFO and chiefstrategist, told an investor conference on Aug. 9.

It's not the first time Boeing has plowed stock into itsunderfunded pension. In 2009, the company contributed $1.5 billion.The shares jumped 27% that year and 21% in 2010. By 2011, the planhad cashed out.

But this time, Boeing's valuation is much higher. With aprice-earnings ratio of 23, the stock is more than three times aspricey as it was at the start of 2009. Given the nature of Boeing'sbusiness, its earnings could be vulnerable to geopolitical shocksor an economic slowdown that saps demand for air travel.

What's more, the longer its pension remains under water, themore expensive it becomes to maintain. The Pension Benefit GuarantyCorp., the government agency that acts as a backstop when plansfail, has tripled its rates for companies with funding deficits,and more increases are on the way.

There's a limit to how long Boeing can put off underfundedliabilities. Over the next decade, the company expects to pay outabout $46 billion to retirees.

Bloomberg News

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