During the financial crisis that started in 2008, many major American companies received funding or bailouts made by the United States Government. Some of the best known recipients include Citibank (C), General Motors (GM), American International Group, Inc. (AIG) and others.
Recent reports state that American International Group could be prepared to buy back a significant number of shares that are currently owned by the U.S. Government. At the peak, the government owned about 92% of the company, but it now owns around 61%. The cost-basis for the Treasury is reported to be about $28.73 per share and AIG shares currently trade barely above that level. The U.S. Government is not interested in being a long-term shareholder and it will probably exit the AIG and other positions it owns, as soon as possible.
This brings us to General Motors, which due to the large ownership stake, has also been called "Government Motors". A recent article is now stating that General Motors is seeking to expand its credit line. This could be signaling that it would also like to buyback at least some of the government owned shares. The article states:
With the company's European operations suffering major losses, increased spending on new vehicles and need to buy back shares from the U.S. Treasury, GM might just need a good source of money for the future, the WSJ added. The company is in talks with existing credit suppliers like J.P. Morgan Chase (JPM), Morgan Stanley (MS), Citigroup Inc, Barclays (BCS) and Deutsche Bank (DB), the paper said.
If you take a look at GM's balance sheet, it shows about $32.6 billion in cash and $14.79 billion in debt. With that type of cash, it seems to have more than enough on hand. Also, while it is losing some money in Europe, those losses are more than offset by profits from North America and other regions, so it is hard to imagine any need for a credit line for "European losses". This leaves a share buyback from the U.S. Government as a potential use for an expanded credit line.
One reason for urgency on this issue could be due to the fact that Obama and Romney are now just about tied in many polls. Romney has recently stated that he would sell government-owned GM shares if he were President, and General Motors might be making contingency plans for that now. If GM were to buy the shares back from the government directly, rather than allowing the shares to be sold on the open market, it would be viewed more positively by investors. First of all, it would lower the share count, and that would boost earnings per share. Also, it would be viewed as a sign of strength and possibly allow the government bailout stigma to fade.
Getting the government out of an ownership and oversight position might also allow it to start paying dividends. This could allow it to follow in the steps of Ford (F), which for the first time in years, initiated a 20 cent per share annual dividend, in early 2012. While it is too early to say what the credit line will ultimately be used for, it sure seems to coincide well with the upcoming Presidential elections and other goals that GM has set for the future.
Key Data Points For General Motors From Yahoo Finance:
- Current Share Price: $21.18
- 52-Week Range: $18.72 to $27.68
- Dividend: none
- 2012 Earnings Estimate: $3.15 per share
- 2013 Earnings Estimate: $4.02 per share
- P/E Ratio: about 7 times earnings
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.