Menu Close

General Motors Returns to Paying Dividends and Buying Back Its Stock

General Motors Company (GM) announced on Friday, Aug. 19 it will start paying a quarterly dividend. The dividend was set at 9 cents with an Aug. 31 record date, which means it will go ex-dividend on Tuesday, Aug. 30. In effect, investors have until Monday, Aug. 29 to buy GM stock and receive the dividend. 

This is its first dividend since April 2020 GM stopped paying 38 cents per quarter. As a result, based on 9 cents per quarter, the new 36 cents annual dividend gives GM stock a 0.90% dividend yield as of Friday, Aug. 19 when it closed at $39.70.

Gen also said it would do “opportunistic” share buybacks. GM’s CFO says this is from its desire to return excess free cash flow to shareholders. The company said it increased its “capacity” to buy up to $5.0 billion in common stock, up from $3.3 billion.

General Motors – Investor Relations

As a result, investors can expect a positive reaction to GM stock as a result of these 2 highly shareholder-friendly moves by the company.

Free Cash Flow Covers the Dividend and Buybacks

General Motors published Q2 results on July 26 showing it has plenty of free cash flow (FCF) to cover the dividend. For example, look at slide 21 from GM’s earning presentation below:

General Motors – from page 21 of the Q2 2022 earnings presentation

This shows that it made $1.4 billion in FCF in the first half of 2022 from its automotive division. That excludes its Cruise start-up operations, a separate autonomous electric vehicle driving company, as well as its GM Finance division.

Note that this free cash flow covers the company’s investments in its plants of $3.7 billion in the first half of 2022. In fact, the dividend announcement press release goes to great lengths to show that GM is investing heavily in its $35 billion growth plan through 2025, over the next 4 years, including 2022. So, for example, the H1 $3.7 billion capex plus $2.1 per quarter from Q2 over the next 3.5 years works out to a total of $33.1 billion over the four years from 2022 through 2025.

This is why the CFO stated that General Motors is now generating “excess” free cash flow. It’s excess over the company’s spending plans to transform into an electric vehicle producer. 

For example, given that GM now has 1.458 billion shares outstanding, the 9-cent quarterly dividend will cost General Motors just $131.2 million, or just under 10% of the $1.4 billion in automotive FCF it made in Q2. In addition, look at the slide below:

General Motors – Slide 23 from the Q2 2022 earnings presentation

This shows that GM expects to make from $7 to 9 billion in adjusted automotive FCF in 2022. Given that it has only made $1.4 billion in the first half, GM must be expecting to make $5.6 billion to $7.6 billion over the next two quarters. That is an average of $3.8 billion per quarter for the rest of 2022. This is significantly higher than the $1.4 billion in auto FCF it made in Q2.

In other words, the $131 million dividend cost will be just 3.44% of its excess free cash flow per quarter. So, now wonder General Motors is now considering buying back its stock. In effect, it will have the ability to buy back $3.7 billion in shares per quarter if it wanted to, assuming its projections come to pass.

Just to be conservative let’s assume that it makes just $1.4 billion in FCF quarterly, Even after deducting $131 million in dividend payments, GM could still buy back $1.269 billion per quarter. And assuming it leaves $269 million to increase its cash balance, GM could comfortably repurchase $1 billion of its stock per quarter or $4 billion annually. 

Where This Leaves Investors in GM Stock

GM’s annual dividend will cost $524 million (i.e., $131 million quarterly x 4). GM could buy back $4 billion of its shares annually. As a result, the total return of capital could become $4.524 billion. 

Compared to its market cap of $57.882 billion (i.e., 1.458 b shares x $39.70) this represents a 7.81% total yield to shareholders (i.e., $4.5 billion / $57.88 billion). This 7.81% total yield (dividend yield plus buyback yield) is an excellent return for shareholders. It implies that GM stock is very undervalued.

For example, let’s assume the market rerates GM stock up to a 5.0% total yield from its 7.81% total yield now. That means by dividing $4.524 billion (i.e., dividends plus buybacks) by 5.0%, the target market cap will be $90.48 billion. That represents a potential gain of 56.318% over today’s $57.88 billion market cap. 

In other words, GM stock is worth 56.3% over today’s price of $39.70 (as of Friday, Aug. 19) or $62.00 per share. Investors can expect to see GM stock move substantially higher if these assumptions work out. 

This coincides with analysts’ projections. For example, Barchart indicates that the average of analysts’ target prices is $55.23 per share. 

GM – Barchart

In addition, 23 analysts surveyed by Seeking Alpha have an average price target of $52.85 per share. And Refinitiv’s survey of 22 analysts shows an average price target of $52.16 per share.

The bottom line is this: GM stock is undervalued and its latest dividend and buyback announcement is likely to act as a major catalyst moving the stock higher.

More Stock Market News from Barchart

Leave a Reply

Your email address will not be published. Required fields are marked *