As the U.S. government exits its bailout derived equity stake in General Motors by the end of this year, current investors are hoping the company issues dividends and/or has a stock buyback while potential activist investors eye GM's hoard of $26.8 billion in cash. Financial analysts expect GM to buy the Series A preferred shares in the company owned by the UAW healthcare benefits trust and the Canadian government and then give cash to shareholders in the form of dividends and buybacks.
"The likely clean-up of the Treasury stake by year end moves capital allocation to the forefront for 2014," Barclays' analyst Brian Johnson said. It will also eliminate GM's current employee compensation cap that was instituted as a condition of the bailout. GM will now be able to pay market rates for talent.
For its part, GM says that it's $37 in total liquidity will be used to invest in existing operations.
"The priorities for cash reinvestment haven't changed," GM Chief Financial Officer Dan Ammann told analysts on a conference call in late October. "We're obviously focused on reinvesting in the business, making sure we have a winning product portfolio going forward." Ammann confirmed that buying the outstanding preferred shares is in the plans for 2014 and that long term GM's priority is returning cash to stockholders.
GM bought 120 million preferred shares owned by the UAW Retiree Medical Benefits Trust for about $3.2 billion in September and another 16 million shares from the Canadian government worth $700 million. Those shares are redeemable on or after Dec. 31, 2014 and pay a 9% dividend. At current low interest rates, it costs less than that for GM to borrow the money and buy back those shares. The Ontario provincial government also divested 14 million shares in GM.
Barclay's Johnson expects GM to buy back the rest of the Canadian government's stake in GM next year and also expects a dividend announcement sometime in the first two quarters of 2014. Johnson also anticipates a GM stock buyback program, buying $1.5 billion worth of its own stock next year and in 2015, and $3 billion to $4 billion a year beyond that as long as the company's profits grow.
GM, or rather the old General Motors which technically no longer exists, last paid a dividend in May of 2008.
Meanwhile, some analysts say that the $26.8 billion in cash that GM is sitting on makes it a tempting target for activist investors looking to make a profit off of those possible stock buybacks and dividends.
Harry J. Wilson, a member of the U.S. auto task force that helped restructure GM during its 2009 bankruptcy, said, "Any company that isn't efficient about capital allocation is a target for activists," said Wilson, who currently works as restructuring consultant at Maeva Group LLC in Westchester, N.Y. "GM has a huge cash hoard and they are generating lots more cash each year, so they need to be thoughtful about that."
The company is projected to double its 2012 annual free cash flow to $5.4 billion next year. While shareholders would like some of that money that would conflict with GM CEO Dan Akerson's strategy of reinvesting cash on new products and buying back the preferred shares issued during the bankruptcy, what GM calls its "fortress balance sheet". That strategy calls for spending about $8 billion annually on capital expenditures including new product development.
When asked about potential activist investors and priorities for the company's cash, GM spokesman Dave Roman said in a statement, "We expect to continue to reinvest in the business, maintain our fortress balance sheet and return cash to shareholders."
The company's valuation makes it vulnerable to activist investors. According to the Bloomberg news agency GM's $42.3 billion value is equal to 3.1 times analysts' average estimate for this year's earnings before interest, taxes, depreciation and amortization (EBITDA). The average of all automakers worth more than $5 billion is 9 times EBITDA.
Scott Schermerhorn, chief investment officer of Concord, N.H.-based Granite Investment Advisors Inc., which oversees investments that include GM shares said that if the company doesn't start returning cash to shareholders one way or another, activist investors could speed up the the process. "Now that the government will be out of the way shortly, I think they need to start focusing on how they return money to shareholders. Based on conversations with them, they understand this. And if they don't bring it up, shareholders will."
Detroit automakers are no strangers to activist investors. Detroit lawyer Solomon Dann sued GM in 1948, forced a change in the executive suite at Chrysler in the early 1960s and his shareholder lawsuit against the Studebaker Packard merger, outlived both of those companies. More than a decade ago Carl Icahn made a run at GM shares and more recently Kirk Kerkorian took stakes in both GM and Ford and tried to orchestrate GM's merger with both Renault and Nissan at different times.
GM's huge $52 billion market value is not considered a barrier to an activist, said Steven Balet, managing director at FTI Consulting Inc. "In a world where Icahn is pressuring Apple, pretty much any company can be a target nowadays," Balet said. Activist Insight, which follows such investing says that so far this year 13% of the targets of activist investors so far this year have been companies with market caps of more than $10 billion, up from 7.1% in 2010.
Companies with a market value of more than $10 billion made up about 13 percent of targets for activist investors so far this year, up from 7.1 percent in 2010, according to the latest data from Activist Insight, which tracks the industry.
While CEO Akerson prefers to invest cash back into the company, "This board understands our shareholders are in here to get a decent return on their money," he told analysts last month. Joseph Amaturo, an analyst at Buckingham Research Group Inc., told his clients last week that he expects GM to start paying an annual dividend next year of 80 cents a share, a dividend yield of 2.1%, in line with Ford's 2.4% dividend yield. Brian Johnson, an auto analyst for Barclays Plc, says the company has enough liquidity to pay out a 40 cent dividend as well as buy back the Canadian government and UAW heath benefits trust stakes.
Still, shadowed by its recent bankruptcy GM is being cautious with its cash. "If we have a fortress balance sheet, we will be able to invest as and when we need to through the cycle," GM CFO Ammann said last June. "We will not be in a position where this company was several years ago where, when the business turned down, things got tight."
from The Truth About Cars http://www.thetruthaboutcars.com
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