GM Signals It Is Back To Normal By Issuing Dividend After Six Years

January 16th, 2014 by Trefis Team
-2.08%
Downside
46.04
Market
45.08
Trefis
GM: General Motors logo
GM
General Motors

General Motors (NYSE:GM) has decided to announce a 30 cent per share quarterly dividend for its common shareholders. [1] The news was imminent after the president of the company announced that the company was close to paying out a dividend, earlier in the week. [2] Shares of the company jumped 3% after the announcement.

This is the automaker’s first dividend in six years and raises the appeal of the company at a time when the treasury yields, or the risk free rates, are rising. A 30 cent-per-share dividend implies a dividend yield of nearly 3% at current valuation levels. During times of relatively high risk-free returns, shares of private companies tend to lose their sheen due to a greater risk involved. A healthy dividend yield ups the appeal of the company.

We have a $40 price estimate for General Motors, which is in line with the current market price.

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Buying Back Preferred Shares

GM has been profitable for fifteen straight quarters but it had to pay out most of its profits to preferred shareholders, as a result of which it could not pay out dividends to common shareholders earlier. For example, in 2012, GM paid out $939 million in cash dividends to its preferred shareholders. However, the automaker decided to buyback 120 million preferred shares at $3.2 billion from the United Auto Workers (UAW) in September 2013. The UAW received preferred stock as part of the $49.5 billion restructuring program in 2009. During times of bankruptcy or liquidation, preferred shareholders have the first claim on the net asset value of a company.

After the buyback, the UAW still has 140 million preferred shares. In addition, the Canadian government also owns about 16 million preferred shares. However, GM has the right to buyback those shares on or after December 31, 2014 at $25 each. ((GM to buy back some preferred shares from UAW trust for $3.2 billion, September 23, 2013, reuters.com)) With significantly lower preferred shareholder commitments, GM can look to return the excess cash to common shareholders.

Given the turbulent last few years for GM, there were concerns whether the company would ever fully recover. Paying out a dividend allays any fears that the investors may have about the company’s stability. A dividend symbolizes that the company is generating excess cash, which it is returning to the shareholders. Overall, 2013 has been a very strong year for the automaker with shares of the company gaining 40%. With this announcement, GM’s shares offer an upside potential in addition to a healthy dividend yield.

GM’s unit sales rose 4% in 2013 to 9.7 million vehicles, including 2.8 million units in the U.S. and 3.2 million in China. [3] The automaker also announced that it expects modest profit gains in 2014 from the refreshed line up. GM will introduce 15 new models in the U.S. and 17 in China. [4] As its profits consolidate, it should continue to payout dividends in the future as well.

See full analysis for General Motors

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Notes:
  1. GM Resumes Dividend Halted in 2008 at 30 Cents, Names CFO, January 15, 2014, bloomberg.com [↩]
  2. UPDATE 1-GM close to reintroducing common stock dividend, CFO says, January 13, 2014, reuters.com [↩]
  3. GM Investor Relations [↩]
  4. GM Forecasts ‘Modest’ Profit Gain in 2014 From New Model, January 15, 2014, bloomberg.com [↩]