Finally some relief.
After all of the labor and economic turmoil of recent months that has punished
General Motors
stock, the company gave investors some good news that will put more cash in their pockets and, perhaps, even boost the stock’s price-to-earnings ratio.
Ahead of GM’s business update, which starts at 8 a.m. Eastern time, the company reinstated 2023 financial guidance, plans to increase its dividend, and will be returning additional cash to shareholders via a big stock buyback.
All three are positives. GM shares were up 9% in premarket trading at $30.71 a share, while
S&P 500
and
Dow Jones Industrial Average
futures were both rising about 0.3%.
Coming into Wednesday’s trading, GM shares have declined about 25% since the start of July when labor issues started to weigh on investor sentiment. The S&P 500 rose about 2% over the same span. Recent declines have left shares trading at similar levels they were at as far back as 2013.
Members of the United Auto Workers union ratified a new labor deal in mid-November. Labor peace has helped a little. Shares have risen about $1.50 since GM reached a tentative agreement at the end of October. That still leaves them down about 27% over the past 12 months.
Investors were feeling better on Wednesday, for good reason. For starters, there is more cash for shareholders. GM’s quarterly dividend will increase to 12 cents from 9 cents. That will give the stock a dividend yield of about 1.7%. That is lower than
Ford Motor
stock’s dividend yield of about 5.8%, but GM has traditionally preferred share buybacks to dividends.
Ford’s higher dividend yield is one reason that stock has traded at a consistently higher PE multiple than GM shares. GM trades for about 4.4 times estimated 2024 earnings. Ford stock trades for about 6 times. Over the past five years, GM stock has traded for an average of about 6.4 times estimated next year’s earnings. Ford stock has traded for about 7.8 times.
There are other reasons stocks trade at different PE ratios including varying expectations for earnings growth, but dividends are one factor.
It isn’t that GM doesn’t return as much cash to shareholders as Ford. The company prefers a mix of buybacks and dividends. GM has repurchased a few billion dollars worth of stock over the past few years. Ford has repurchased less than a billion.
GM also announced Wednesday a $10 billion accelerated share repurchase. That’s significant. GM’s market capitalization is about $40 billion. GM is buying back 25% of the company.
“We can do it comfortability and still maintain the liquidity and [financial] targets that are important to maintain the credit ratings,” said Chief Financial Officer Paul Jacobson on a conference call Wednesday. “We’ve got to maintain a strong balance sheet.”
Then there is guidance. That’s another reason for the stock’s jump. GM expects to generate an operating profit between $11.7 billion and $12.7 billion in 2023. The previous outlook was $12 billion to $14 billion. Wall Street is projecting $12.2 billion, right in the middle of the new range.
Free cash flow guidance also was higher. GM expects a range of $10.5 billion to $11.5 billion, up from prior guidance of $7 billion to $9 billion. Wall Street is projecting $7.8 billion. The better guidance could be a function of lower capital spending or better working capital controls.
GM is spending billions a year to scale its robotaxi business, but the company has had some troubles lately. California recently suspended Cruise’s license to operate self-driving taxis in the state after an accident.
There is still uncertainty about Cruise and how new EV models, such as the Chevy Equinox, will sell, but the Wednesday update, so far, is good news for investors.
Write to Al Root at allen.root@dowjones.com
Read the full article here