Doubting if the growth ahead of GM is now over, and the great post-bankruptcy "success story" is rapidly fading as the company has been pushed to resort to the kind of financial engineering which has pushed the S&P higher for all of 2014, and follows a record month of stock buyback announcements? Then doubt no more: moments ago GM announced it is authorizing an immediate $5 billion stock buyback, and plans to return all cash above a $20 billion floor to shareholders.
From the Press Release:
General Motors Co. (GM) today announced a comprehensive capital allocation framework, as improving business performance and strong capital discipline enable increased returns to shareholders. GM said a foundational element of its approach will be to return all available free cash flow to shareholders while it maintains an investment-grade balance sheet underpinned by a target cash balance of $20 billion.
GM also announced that its Board of Directors authorized the initial repurchase of $5 billion in GM shares to begin immediately and conclude before the end of 2016. GM in February announced its intent to increase its quarterly stock dividend to $0.36 per share effective in the second quarter of 2015 as part of the Board's regularly scheduled second quarter 2015 dividend declaration process, which would result in an expected dividend payout of approximately $5 billion through year-end 2016.
"As we continue to execute on our plan to become the most valued automotive company, our track record of improved operating performance, strong earnings momentum, and disciplined capital investments provide the foundation for a comprehensive capital allocation framework," said GM CEO Mary Barra. "We will continue to invest in innovative technologies and world-class vehicles that will deliver sustained profitable growth and maximize returns to shareholders."
GM's capital allocation framework encompasses three core principles:
- High-Return Investment in the Business – GM previously stated it expects capital expenditures in 2015 of $9 billion to invest in future growth, including a more aggressive vehicle launch cadence in the coming years. GM will reinvest in its business with the objective of driving 20 percent or higher return on invested capital (ROIC) through investments in world-class vehicles and leading technology. The company plans to disclose its ROIC performance each quarter beginning with its first quarter 2015 report. The company expects this disciplined capital deployment will strengthen and grow GM's brands and drive improved financial performance and will result in capital spending in the range of 5–5.5 percent of its annual revenue in the future.
- Maintain an Investment-Grade Balance Sheet – GM intends to maintain an investment-grade balance sheet, including a target cash balance of $20 billion. GM believes maintaining an investment-grade balance sheet is critical to support long-term growth and increased earnings at GM Financial, which is a catalyst for improved automotive sales and profitability.
- Return Capital to Shareholders – Beyond reinvesting in the business and maintaining an investment grade balance sheet, the company expects to return all available free cash flow to shareholders. Starting in January 2016, GM will develop its annual capital return plans and communicate them to the market during the first quarter of each year.
In 2014, the company established an executive compensation program that aligns management incentives with ROIC and total shareholder return. GM said it is committed to providing greater clarity around its compensation program and will continue to evaluate the program to ensure that strong linkage.
GM reaffirmed that in 2015 it expects its total earnings before interest and tax (EBIT) adjusted and EBIT-adjusted margin to increase, compared to 2014, after adjusting 2014 for the impact of recall costs. The company reiterated that it is on track to meet its 2016 financial targets to achieve EBIT-adjusted margins in North America of 10 percent; to return to profitability in Europe; and to maintain strong margins in China. It also reaffirmed its long-term strategic plan to achieve 9–10 percent EBIT-adjusted margins by early next decade.
* * *
Why is GM doing this? Because as Goldman's David Kostin announced over the weekend, the only stocks worth buying left are those in which investors frontrun management's own price-indiscriminate purchases of its own corporate shares (and in the case of tech stocks, management is selling while the company is buying).
And just like that March is off on a solid footing to topple February as the record month of stock buyback announcements, which in a world in which S&P 500 revenue growth is now expected to post its first annual decline since Lehman, is the only deus ex to boost earnings per share left.