American automotive giant
again returns capital to shareholders – and its stock rose on Friday.
Market reaction, however, lagged behind the boost Ford Motor (ticker: F) shares received when that company reinstated quarterly payouts to shareholders. There’s a good reason for that.
(GM) seems to be a bit more conservative than its Crosstown rival.
GM will pay investors a dividend of 9 cents per quarter. The company is also repurchasing up to $5 billion in stock.
GM shares gained 2.5% in Friday trading. The
Dow Jones Industrial Average
fell about 1.2% and 0.9%, respectively.
“GM is investing more than $35 billion through 2025 to advance our growth plan, including rapidly expanding our electric vehicle portfolio and building a national battery manufacturing infrastructure,” CEO Mary Barra said in a statement. Press release. “Progress on these key strategic initiatives has improved our visibility and reinforced confidence in our ability to fund growth while returning capital to shareholders. »
A dividend, of course, is a vote of confidence from management. This signals the belief that cash flow will be strong for years to come.
At 9 cents on the quarter, or 36 cents per year, GM stock will return just under 1%.
pays investors 15 cents per quarter, or 60 cents per year, and its shares earn closer to 4%.
When Ford reinstated its dividend in October 2021, it started with quarterly payments of 10 cents. At the time, that gave Ford shares an expected return of about 2.6%. The dividend announcement pushed Ford stock up 8.7% on October 28.
Ford, of course, suspended its dividend in early 2020, amid the Covid-19 pandemic, as did GM and many other companies. GM’s most recent dividend was a payment of 38 cents per share in March 2020.
Cash flow, of course, underlies all returns of capital to shareholders. GM has generated positive free cash flow in seven of the eight quarters since the start of the pandemic. Over the past year, GM has generated cumulative free cash flow of approximately $3 billion.
An annual dividend of 36 cents – four quarters at 9 cents – will cost GM about $500 million a year, a figure the company seems to be able to manage easily. Wall Street expects GM’s average annual free cash flow to exceed $5 billion a year for the next few years.
Ford spends about $2.4 billion a year on dividends. This represents about half of the company’s projected cash flow over the next two years.
Ford is a bit more aggressive. But the structure of the company could be partly responsible. The Ford family owns approximately 71 million “B” shares which carry 36 votes per share. This gives them substantial control of the business. If the family prefers dividends to buyouts, then it is more difficult for the board to object. Ford did not immediately respond to a request for comment from Barrons.
GM, it should be noted, is also buying back stock. GM recently began buying back shares, with a buyback of approximately $2.1 billion of preferred stock in the second quarter of 2022. These were held by
(9984.Japan) and linked to GM’s Cruise self-driving car business. Yet they are increasing GM’s ownership in an asset, to the benefit of existing shareholders. The last significant repurchase of common shares dates back to 2017.
Benchmark analyst Mike Ward noted in a report Friday that the combination of dividends and buyouts gives GM a bit more financial flexibility. It rates GM Buy shares. His price target is $60 per share. It also assesses which Ford shares to buy. His Ford price target is $23 per share.
Ford has not repurchased any shares recently. Its last substantial buyout was in 2019.
When it comes to Ford and GM, it seems like investors prefer dividends to buyouts.
Write to Al Root at email@example.com