Dunkin' Is Speeding Up, and Buybacks Are Slowing Down

Boeing‘s (NYSE:BA) stock falls 10% in the wake of a damaging report regarding its knowledge of 737 Max problems in 2016. And Goldman Sachs (NYSE:GS) warns clients that stock buyback plans are on the decline. In this episode of MarketFoolery, Jason Moser joins host Chris Hill to analyze those stories and the potential ripple effects for investors. Plus, DunkinBrands (NASDAQ:DNKN) announces a national rollout of its Beyond Meat (NASDAQ:BYND) sausage sandwich much sooner than anticipated.

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This video was recorded on Oct. 21, 2019.

Chris Hill: It’s Monday, Oct. 21. Welcome to MarketFoolery! I’m Chris Hill. With me in studio today, the one and only Jason Moser. Thanks for being here!

Jason Moser: Hey, hey!

Hill: We’ve got some restaurant news. We’ve got some share buyback news that depending on your point of view may be good news or it might be bad news. We’ll get into that. 

We’re going to start with Boeing, though, because shares of Boeing are down 10% in the last two days of trading, and we’re not even through the full trading day on Monday. We’re just going for Monday morning and all of Friday. And this is because on Friday afternoon, emails from late 2016 came to light that basically highlighted technical problems that the 737 Max had that were, and I’m quoting from one of the emails, “running rampant in the flight simulator sessions.” I saw this story Friday afternoon. This was after we had taped Motley Fool Money, which is why we didn’t include it in the most recent episode. But this appears to be the latest example of the old adage that in politics and in business, the cover up is worse than the crime. 

Moser: Yeah, I’d say that’s probably fair. It’s a very good lesson as an investor to always remember that it can always get worse. Even when it seems like things are as bad as they can be, never ever dismiss the possibility of things getting a little bit worse. This qualifies. There are just so many things that stem from this, from culture problems to actual chain of command problems to how good of a grasp management actually has on this problem. Do you even trust Boeing at this point? It’s very easy to understand the short-term concerns and the problems here. We’re watching that play out on Boeing’s stock price. We read how we have gone from what was once considered the greatest product, the greatest driver of this business ever, to now what is one of the biggest failures, if not the biggest failure, and one of the biggest drags on the company for the foreseeable future.

They have a lot of damage control to take care of. It’s not to say this is the end of Boeing. I’m not trying to jump into that hyperbole there. But it is something for investors, you need to start wondering, is it even worth looking at this business? You have to think about all of the implications beyond just Boeing. Think about all of the companies that are in the supply chain that work with Boeing. They have more than 600 suppliers in that supply chain that are going to be affected by this. One of them, Spirit AeroSystems, Boeing’s biggest supplier. Boeing is their biggest customer. Spirit is a fraction of the size of Boeing. They are now in this… they don’t know what exactly is going to happen. It’s not just Boeing, is the point. We saw it play out with the automakers a number of years back. Big problems with big companies like this can reach out and affect a lot of different companies. This is something that is certainly global. It’s obviously very important in the market of air travel. I don’t know that there’s anything that tells us things are going to be getting better anytime soon.

Hill: Not surprisingly, there are more calls for, whether it’s greater intervention by regulators, more Congressional hearings, that sort of thing. For whatever you think of those processes, those are things that, at the end of the day, take focus from the business away from what they’re trying to do, and they have to go deal with that. That’s one of the things that, you look back 20 years ago on the government looking to break up Microsoft. Microsoft spent so much time and energy and money dealing with those issues that they missed the boat on some other initiatives. So, for anyone who was looking at the latest round of earnings that came out — we talked about Delta and American Airlines, United as well — and you have CEOs coming out and saying, “Yeah, our timeline on the set 737 Max has been pushed back a little bit.” For anyone who thought, “OK, maybe January 2020 is when this is behind Boeing,” this is something that points to the fact that it gets extended even further. 

To your point about the stock, I think it’s harder and harder to make the case for Boeing. On the flip side, by the way, if when this whole thing started, you were a Boeing shareholder, and you thought to yourself, “I think this is going to get worse before it gets better. I’m going to sell my shares of Boeing, and I’m going to buy shares of Airbus.” Congratulations! Airbus is up 45% year to date!

Moser: As it should be. What we’re focusing on here, we’re trying to figure out is, is there an opportunity here for investors as it pertains to Boeing? And there very well may be. The stock has gotten pummeled. All things considered, it is a company with a long track record of success, playing a vital role in the market that it serves. If you look back to the call, they were talking about getting this thing back up and running as early as the fourth quarter of this year. That is clearly not going to happen —

Hill: I was going to say, the quarter we’re in right now?

Moser: — there are going to be investigations, there are going to be questions. Regulators are going to probably leave, at this point, no stone unturned, given these texts that just came out over the weekend. It’s clear that we don’t know everything, and there probably is more bad news out there. So then you have to think, if we’re that delayed on the 737 actually coming back online, then you have to start making an estimation of when you think that’s going to be, how much of a tailwind you think that could be for the business, but then also take into consideration all of the other dynamics of the company’s financials. The top line was fairly stagnant. It’s safe to assume that we’re going to see a little bit of a deceleration there. With a company like this — we’ll talk more about share repurchases in a little bit — they spend more than $ 40 billion in share repurchases since 2014. That’s brought the share count down significantly, about 20% since then. My point being that share repurchases have been a big part of thesis of investing in this company. And those repurchases now are on hold. They should probably be on hold for many, many quarters to come, even after they get this all resolved, because they do need every financial resource they can get. So, to me, that leads me down that road of, there’s more uncertainty here than I care to deal with. There probably is some kind of a dirty value play here, but, man, I’d give it some time and wait for the rest of this to shake out because I don’t think it’s done. 

Hill: It’s a great point about the top line for Boeing. One of the arguments that people make, and they’re not wrong when they make it, when they talk about Boeing, the multiyear lead time. Airlines have these planes on order several years into the future. I get that. But if you’re United Airlines, if you’re Oscar Munoz — a concept we talk about all the time, across all manner of industries, is pricing power. Who has the pricing power right now with Boeing? I get that you can’t necessarily switch, like, “Oh, I’m going to cancel my order Boeing, and I’m going to put it here.” This isn’t’ Uber Eats. “I didn’t like the food, I’m going to cancel it. I’m going to order from this other place, and it’ll be here 20 minutes later.” I get that. But I feel like if you’re United Airlines, any of these major airlines, you’ve got more pricing power than you had, say, six months ago. And you get to go to Boeing and say, “I’m not looking to switch to Airbus, but I’d love it if we could negotiate the price a little bit more.”

Moser: I couldn’t agree more. I think you’re totally right. And when you look at it even one step beyond that, recognize that the airlines that were most dependent on this plane, they’ve already essentially ratcheted back their guidance and their plans. They’ve adjusted schedules, they’ve taken flights off the docket that were there. They’ve adjusted, more or less. So they’re not looking at this from a point of desperation, from a stance of desperation. When you aren’t desperate, then you’re going to be able to negotiate a little bit more. You’re going to have a little bit more negotiating power. Listen, you need Boeing and Airbus, to supply this market. I don’t think one company is going to be able to take care of it all. But, yeah, if you’re an airline and you’re looking to get this thing back into the rotation, you’re going to go back to Boeing and say, “Listen, guys, we’re not going to try to rake you over the coals here, but give us a little something. Give me a little reason, a little consideration, some goodwill that makes me feel comfortable signing on with you, sticking with you for the long haul.” And that’s going to play out on Boeing’s financials.

Hill: Last week we talked about retail spending possibly being scaled back this holiday season. It looks like consumers like you and me may not be the only ones spending less. Goldman Sachs is warning clients that companies are spending less on share buybacks, predicting that for all of 2019, share buybacks are going to come down about 15% year over year, with the thought that there’s going to be another 5% drop in 2020. Again, depending on the companies that you have in your portfolio, depending on the track record of the management teams when it comes to buying back shares, you’re either thrilled by this news or you’re realizing that this is going to ding your returns a little bit.

Moser: It very well could. There are a couple of interesting angles to the story that I was thinking about as were talking about it this morning. No. 1, when you look at the S&P 500, and you consider the companies that are a part of that index, if you look at the share repurchases for the second quarter of this year, they were $ 164.5 billion. That was 20.1% lower than last quarter. It was 13.7% lower than the same quarter last year. When you look at that total number, $ 164.5 billion, noteworthy is the Apple spent close to $ 20 billion on share repurchases. So ultimately, Apple was responsible for about 11%. When you look at it even further out, the concentration is even more stark. The top 20 companies in the index accounted for basically half of the total in repurchases. That’s one thing right there. 

Now, the other thing to keep in mind — Chris, we’re not market timers here. 

Hill: Speak for yourself. No, we’re not.

Moser: We certainly try to point people toward that longer-term outlook. But, it is worth noting, because FactSet has got some very good data that stretches back quarters and years. And ultimately, the story that it tells is that companies, for the most part, on average, they get share buybacks wrong at least from the perspective of, if you’re looking for companies to buy their shares back at low prices. It seems that, when the times are good — and times have been good. We also have to remember, not only is the consumer in good shape, but these companies had some fairly substantial tax legislation that went their way, that encouraged them to return more value to shareholders. But generally speaking, this FactSet data tells us that when times are good, companies are feeling great, they’re flush with cash, they’re buying back stock. And then they start pinching the purse strings just a little bit as they see things slowing down. And then you see underperformance in the market. These companies really pull back on the share repurchases and protect their coffers. 

Now, that’s all just to say that if this is something we’re seeing coming down the pike here, that FactSet data historically tells us one thing. If history remains true, then logically, we would see some type of a pullback in the market from this, if this is true, if that correlation still remains. And there’s no reason to think it wouldn’t. I’m not telling people to wait for the market fall because it’s coming. But I think that is something to at least pay attention to when you see data like this. There are certainly data out there that tells us that as these companies start pulling back on the repurchases, we see things slowing down, we see underperformance in the market. And that underperformance in the market could be a nice time to be buying, if you’re a net buyer of stocks, as we are.

Hill: One question to ask, as you look at the companies in your portfolio, is, of the CEO, how good is this person at capital allocation? It’s entirely possible, particularly if you’ve got some of these younger growth companies in your portfolio, they’re not buying back shares. And, for that matter, you don’t want them to. But you also want to make sure that the investments that they’re making in growth are the right ones.

Moser: Yeah. Buying back shares, at the end of the day, it’s an investment. With a lot of these smaller companies, a lot of these SaaS businesses that we keep talking about, they’re younger, they need those finances, they shouldn’t be repurchasing shares. I was very critical of Spotify at one point for repurchasing shares. They need that capital. So, make sure you invest it wisely. 

We talked about Boeing. You look at all of these repurchases they made over the past five years. Starting in 2014, going to today, do those repurchases look like a wise investment? I don’t know. It seems like maybe we could argue no. 

Look at another company, one we love talking about, one I love talking about here, of course, is McCormick. The reason why I bring up McCormick is because they made that big RB Foods acquisition a couple of years ago, and very explicitly said, part of this deal because it’s so capital intensive, we’re suspending share repurchases, we’re not going to be buying back any more shares, we want to focus on making sure that we can pay our dividend, that we can grow our dividend, keep that dividend aristocrat status, and when the time is right, when our capital ratios have gotten back to this level that we’re setting for you now, then we can consider starting to repurchase shares again. But they just made that blanket statement, that, listen, we value this capital, we need it for this, we’re not going to use it for repurchases. And to this point, that’s been a very wise call. 

Again, the signs that investors can look for when it comes to share repurchases, at the end of the day, they’re supposed to reduce the shares outstanding and make your shares more valuable. If you look at a company’s net income vs. earnings per share, those are two different numbers. Net income is the one big number. Earnings per share brings in the number of shares. If you don’t see that net income growing, but you see the earnings per share growing, that’s a function of them reducing that share count. That can be OK. It is a matter of the company that you’re investing in, the thesis, and whatnot. We see a lot of companies exercise that judgment every quarter. That’s part of the deal. Always something to keep in mind.

Hill: Earlier this year, Dunkin’ had been testing a Beyond sausage sandwich at locations in Manhattan with an eye toward rolling it out nationally next January. The company came out today and said that the test went so well they’re going to be available nationwide Nov. 6. There are a few data points to this story that I find interesting , starting with the fact that they were testing this in Manhattan. The company said that they sold roughly twice as many sandwiches, it was that much more popular than they had originally thought it was going to be, according to their own internal metrics. I’m not a Dunkin’ shareholder. I’m a huge fan of the company. I contribute. If you’re a shareholder, you’re welcome! But, the testing in Manhattan was always interesting to me because Manhattan is not historically a test market. It is not the “Middle America” place. There’s a reason that when Burger King was testing the Impossible Whopper, they didn’t do it in New York or LA or even Chicago; they went to St. Louis. They went to the middle of the country. They went to 60 locations. I’m rooting for Dunkin’. I will absolutely try one of these things. 

Moser: Will you really?

Hill: I will!

Moser: Absolutely?

Hill: Absolutely, if it comes to the one across the street or the one by my house.

Moser: Oh, now there’s the qualifier. If it comes to the one across the street. What about the one next to your house?

Hill: That’s fine too. I’m just not getting in a car and driving to one.

Moser: I hear that. I don’t blame you! Maybe with Manhattan… data is valuable in great numbers, maybe they felt like they were they were going to get so much data that it would be a little bit more reliable. I agree, it’s not necessarily as representative of Anytown, USA as other places could be. 

Maybe this is the opposite of what other people feel, when it comes to Beyond Meat and meat substitutes, I feel like the fast food industry is exactly where this product makes the most sense. Here’s why. I don’t think it’s because people are going to McDonald’s and saying, “Hey, you know what? I would love it if they had a little bit of a healthier substitute than this Big Mac I’m looking to get.” When you go to McDonalds, you know what you’re going there for. Health is probably not top of mind. But when you look at fast food by nature, you could substitute a Beyond Meat product for a typical fast food patty. The difference in taste is going to be somewhat negligible. Now, if I invite you to my house one night and I cook burgers on the grill, you’re going to taste a significant difference between the burger I make you and if I slap a Beyond Meat patty on the grill. Now, this comes from a quasi-educated opinion on my part, Chris. I’m not just saying this without having anything to back it up. I have tried at least one Beyond Meat product. We got the bratwurst one night at our house just to try them. I have to say, I was not a fan. I’m not a vegetarian. I am looking for ways to curb meat consumption. We’re adopting a meatless Monday dinner in our house. I do all the cooking for the most part, so I’m able to be a part of that. 

Hill: What’s for dinner tonight? 

Moser: Actually, you know what, tonight might be an order-out night.

Hill: So, starting next week? 

Moser: I’m justifying this because I’ve got to swing over to Ikea and pick up a mattress, and it’s going to be rush hour. My fear is I won’t be home until 8:00 anyway.

Hill: Oh, don’t be afraid! You 100% will not be home until eight.

Moser: But last night, it was mashed potatoes and green beans and roast pork. That was really good. Mad Max turkey seasoning on pork. How about that? Kids, take note! It’s a little bit of Thanksgiving before Thanksgiving. 

But yeah, I was not impressed with the product. If they are looking to get people like me, who aren’t necessarily looking to make that switch to being a vegetarian, but looking to reduce meat consumption, I don’t know, there are a lot of different ways I can go meatless. It could be any number of ways. That’s where my concern comes up with something like a Beyond Meat or any meat substitute companies beyond fast food. I think they make a lot of sense for fast food restaurants. 

The valuation of the stock still makes zero sense. It just doesn’t. It’s a neat company. I’m pulling for them, I really am. I think for Dunkin’, this makes a lot of sense. When you look at Dunkin’, you look at their comps from the third quarter a year ago, 1.3%. Quarter two a year ago, 1.4%. We always talk about restaurants. The key is to get those comp numbers up. Drive traffic. And the way you drive traffic is menu innovation, bringing new things into the market. We know the power of breakfast. If it’s something as simple as throwing a new menu item on here like this, I think it’s less about the meatless option and more about menu innovation and giving consumers another choice. If it works out, great! But again, we’ve seen already that just because companies are quick to make menu adjustments like this doesn’t necessarily mean it’s permanent. We still aren’t very clear as to how Beyond Meat is going to be able to handle all of this supply chain constraint, assuming everybody is signing on.

Hill: Yeah. From a stock perspective, I feel better about how this moves the needle for Dunkin’ Brands vs. Beyond Meat? By the way, Dunkin’, that stock’s done pretty well in 2019. Up about 20%. You just raised another thing I find interesting about this story, which is fulfillment. I’m curious to see how they’re able to keep this going, particularly with moving up the timeline from January to November. We’ll see. It’ll be interesting to see. By the way, one of the ways we always look at any type of business announcement is not just “what does it mean for the company” but “what does it mean for the competition?” I don’t know if you’re Starbucks, if you’re necessarily concerned about this. I look at what Starbucks has to offer in terms of foods, both in terms of breakfast and throughout the day, they have non-meat options. If you’re Starbucks, you almost don’t even need to worry about this. I don’t think there’s going to be nearly the level of interest. In fact, if Starbucks had come out with an announcement like, “We’re making some big push into this,” OK, you can do that, I don’t know that’s going to move the needle for Starbucks.

Moser: Yeah, I don’t know that it does. It’s a nice way to innovate your menu, become a little bit more with the times, give something that some people out there want. I don’t think that all cities and states are equal. I don’t think all markets are equal where this is concerned. Some areas, there will be more demand for something like this than others. But I almost wonder if fast food restaurant concept, just under the cover of night, one night, just changed everything, all of their patties — sausage patties, burger patties, everything went to the meatless substitutes — I wonder how many people would actually notice. It’s just not known for its high-quality taste. I’m not knocking it, it’s just the purpose that it serves. It’s a value-oriented offering. You can get away with changing that menu a little bit more easily than you can get away with changing the menu of a company that is focused more, and messaging more, on the quality of the ingredients and the end result.

Hill: Jason Moser, thanks for being here!

Moser: Thank you!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That does it for this episode of MarketFoolery! The show is mixed by Austin Morgan. I’m Chris Hill. Thanks for listening! We’ll see you tomorrow!

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