General Motors Restarts Its Dividend and Increases Its Buyback Capacity

Mark Hake

This is not financial advice and you should not rely on my analysis to buy or sell any stock. I am not undertaking to induce you to buy or sell any securities. I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

General Motors Company (GM) announced on Friday, Aug. 19, that it would start a quarterly dividend of 9 cents. They cut the dividend in April 2020, which was 38 cents quarterly.

As a result, GM stock now has a dividend yield of 0.90%, since its annual 36 cents dividend represents 0.90% of the price at $37.90 as of Friday.

However, now there is good reason to believe that GM stock could be worth substantially more. General Motors said it was increasing its "capacity" to buy back up to $5 billion of its common stock. That is up from $3.3 billion in prior guidance.

Keeping Up With the Auto Jones

It's likely this could be good news for investors in GM stock. It is severely depressed after years of playing catchup to Tesla (TSLA) and even Ford (F), in the transition to mass production of full battery electric vehicles (BEVs).

For example, in the last 5 years, GM stock is up only 12.46%, whereas TSLA stock is up over 1200%. In fact, Tesla's market value is $929.6 billion, which is 16 times GM's $57.88 billion market capitalization.

Ford's market value is over 10.3% higher at $63.8 billion, but the stock is up by 50% in the last 5 years. But both GM and Ford are selling fractions of the number of BEVs that Tesla is doing now, although their production of internal combustion engine (ICE) vehicles dwarfs the size of Tesla's vehicle production.

In other words, the market values BEV producers much higher than ICE vehicle manufacturers.

One way for GM to show that it is on track with helping its shareholders in this game is by paying them a dividend and excess free cash flow through buybacks. General Motors can show its shareholders it is making progress and yet still give them a portion of the dividends and buybacks as in the past.

In other words, it is trying to straddle both realities in the automotive world. It wants the high valuation that a full BEV transition will give it, but in the meantime, it wants to satisfy its existing shareholder expectations for dividends and buybacks.

Ford Motor has already taken a similar path. The company restarted its quarterly dividend at 10 cents per quarter in Q3 2021 and recently hiked it to 15 cents on July 27.

What This Means for Investors

General Motors can now clearly afford to pay the dividend, which I estimate will cost about $131 million per quarter. This is just below the $1.4 billion in automotive free cash flow (FCF) that the company generated in Q2.

So annually, the 36-cent dividend will cost General Motors $524 million. In addition, the company said it could spend up to $5 billion on buybacks, now that it has excess FCF.

The company reported that its annual FCF automotive guidance in 2022 is for $7 to $9 billion. This does not include its finance division and its Cruise subsidiary (self-driving start-up division).

So you can clearly see how the company can afford to pay $5 billion in buybacks and $524 million in dividends.

This could act as a significant catalyst for GM stock. In fact, my recent analysis of the company's value is for $90.5 billion, up 56% over its $57.88 billion valuation today. That puts its per share valuation at $62.00 per share.

The bottom line is that GM stock will benefit from the dividend and buyback announcement. Analysts believe the stock is worth between $52.85 and $55 per share. As a result, expect to see fireworks in the trading days ahead.

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Mark R. Hake, CFA writes articles at InvestorPlace.com, Barchart.com, Medium.com, and Newsbreak.com as well as a Beehiiv free newsletter on stocks and cryptos.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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