General Motors Company (NYSE: GM) stock is up more than 9% after the company announced plans to buy back $10 billion worth of shares (nearly 25% of the company's market cap). The automaker also announced a 25% increase in the company dividend from 9 cents to 12 cents beginning in 2024.
The announcements were part of the company's first business update since striking a deal with the United Auto Workers (UAW) union and the Canadian union Unifor. The company expects that the new contract will cost it $9.3 billion.
General Motors also reestablished its 2023 full-year guidance. It had previously declined to offer guidance while the UAW negotiations were ongoing. The company now expects net income attributable to shareholders to come in between $9.1 billion and $9.7 billion. The prior guidance was for net income in a range between $9.3 billion and $10.7 billion.
The company also adjusted its operating profit forecast. Its prior forecast was for operating profit between $12 billion and $14 billion. The new guidance comes in at $11.7 billion on the low end and $12.7 billion on the high end. The good news is that analysts are forecasting $12.2 billion.
How do you pay for this?
Not to state the obvious, but making cars is a capital-intensive business. Yet, as part of GM's announcement the company is pledging to cut capital spending. Granted, the company "only" cut about $500 million from its prior estimate. But this is where details matter.
A significant part of the cost-cutting will come from the company's Cruise self-driving vehicle unit. That unit lost over $700 million in the third quarter alone and has cost GM over $8 billion since 2016. To that end, GM chief financial officer (CFO) Paul Jacobson said spending for Cruise would be down "hundreds of millions."
The company is also in the midst of cutting its fixed costs by up to $3 billion. This started in April 2023 when about 5,000 salaried workers agreed to buyouts.
With that said, you begin to see a path forward. However, the company is relying on electric vehicle (EV) sales to drive its business forward, and GM CEO Mary Barra conceded that the demand for EVs has been underwhelming. Therefore, it seems counter-intuitive to be cutting capital spending. Simply put, every dollar they take away from capital spending could come at the expense of future sales.
Could investors sell the news?
It's not uncommon for investors to "buy the rumor, then sell the news." In this case, the news came out of the blue, so the initial reaction is equivalent to buying the rumor. The question that investors have to ask is, will GM stock hold its gains?
In midday trading, it seems that investors are taking a wait-and-see approach. After the initial spike, the stock is holding its gains but is not moving higher. Even with a gain of over 9%, GM stock is still down 14% in 2023.
Among automotive stocks, General Motors still has a very attractive valuation at just 4x forward earnings. The company's dividend, even with the increase, will be significantly less than that of Ford Motor Company (NYSE: F). However, GM has always prioritized share buybacks over dividend growth. Their latest move shows that this is still the plan.
Investors on the sidelines may want to avoid FOMO with GM stock. The company's next earnings report won't be released until January. At that time, the dust will have settled, analysts will have weighed in, and you may have a better picture of the company's long-term outlook.
