Want A Piece Of General Motor's Growing $27 Billion Cash Reserve?

Dec. 5.13 | About: General Motors (GM)

A profitable General Motors Co. (NYSE:GM) is on its way to being free from a half of a decade of U.S. government monitoring next month. The end of the monitoring heralds the comeback of a once weak industry and the company's ability to gain more control over the $27 billion cash pile that it will use to attract investors by promising dividends in the future.

The U.S. Treasury Department intends to sell 31.1 million of GM's common shares by the year end. The exit would end restrictions on pay for top executives that the company said has hampered recruiting and will aid the company in achieving further efficiency.

This sale will end the US government's control over the company that came into effect when GM was going bankrupt back in 2008. Since then the company was able to reduce its debt and recover. Like its competitors Ford and Chrysler, GM was able to report profits again. In the last two years, the company has seen its stock value jump by more than 80% to $37 in November. Not only that, the company is nowhere near the end of its growth period and is continuing to expand further into international and local markets.

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Source: Morningstar

Big Reserves

In the last few years, the company has built itself what is called a fortress balance sheet. Current cash reserves equal $26.8 billion and not a single dividend has been paid since 2008. As concerns are raised by activist investors concerning the huge piles of cash demand it is anticipated that GM will return cash to its shareholders through dividends and share buybacks in the following year.

According to data compiled by Bloomberg, GM already trades at a valuation that's cheaper than 97 percent of its competitors including Ford (NYSE:F). It is projected that the company will generate $5.4 billion in free cash flow in 2014 and that will be double the 2013 figure.

Even though a push to share the wealth with shareholders will clash with CEO Dan Akerson's goal to continue spending on new products and buy back preferred shares left after the bankruptcy, GM knows that such unwillingness could result in damaging consequences that could potentially bring stock value down. This is confirmed in a statement by the CEO, "We understand what we're here for and one of them is to return money to our shareholders. And that will be a continuing theme not only this quarter, but the next year and the year after."

With that in mind, GM has sufficient cash to pay an annual dividend of 40 cents a share and buy back stock including the Canadian government's $4.1 billion stake next year and the UAW health-care trust's $5.3 billion stake in 2015.It is predicted that GM will start by offering 80 cents a share which could cost GM nearly $1.2 billion a year. However, with huge piles of cash and shareholders desperate to see cash returns being rewarded for their patience starting out high could give a sense of relief for those long waiting investors. They can expect a dividend yield of nearly 2.2% which will be a little less than Ford's 2.4%.

About GM

With some famous brands under its name like Cadillac, GMC and Chevrolet, GM operates under four divisions that cater towards its sales in North America, South America, Europe and the Asia Pacific/Middle East region. It derives almost 50% of its revenue locally and the rest from international operations.

With Chevrolet providing sales growth for the last twelve consecutive quarters GM was able to report its net margin at 4.4% this recent quarter compared to Ford's 3.5%. Its EPS was $0.45 which is 45% higher than Ford's $0.31.Consequently, this good performance has earned GM an investment grade rating by Moody's. To further strengthen its balance sheet, the company launched a refinancing scheme of $4.5 billion in the last quarter.

GM has been able to change the cost structure that previously brought it down. It plans to spend $8 billion in capital expenditures next year. CEO Akerson has set several goals which include increasing North American operating margins, reducing European losses and boosting sales in China. He has improved GM's main global brands Chevrolet and Cadillac.

GM is bringing out 18 new vehicles this year and 14 vehicles next year as its works to transform and modernize its lineup. The Chevrolet Impala was the first U.S. car chosen as the best sedan on the market by consumer reports and the Cadillac CTS was picked as Motor Trend's car of the year.


In regards to the international markets the Chinese market offers tremendous potential for everyone. There is plenty of room to grow over the next five to ten years. That being said, the automaker that secures the biggest market share in this period could gain a long term advantage due to brand loyalty and that is facilitates domination of the auto sector.

To push its growth, GM is boosting its Cadillac brand in China. The company started local production for the Cadillac XTS earlier this year. By the end of September, Cadillac sales grew by more than 50% in China. GM and its joint venture partner SAIC are expanding Cadillac production capacity over the next few years. GM hopes to grow Cadillac sales in China to 100,000 units by 2015 and 250,000 units by the end of the decade.

Concluding Remarks

Investors can expect dividends anytime during early 2014. If gaining a dividend and enjoying a little price appreciation is your goal, I believe GM's stock is appropriate for you. Nonetheless, for long term investors, GM's prospect still looks promising. With growing shares in China and GM being freed from US government control, we can expect more liberal operations and heavy salaries for top management. This will be beneficial for both successful strategy implementation and making sure that GM rises in value more in the future. Therefore the stock is a must buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.