Ford Almost Delivered, Will GM Be The Spark?

Includes: F, GM
by: AssetInflation

Ford Motor Company (NYSE:F) announced earnings this week and almost fulfilled our expectations. Earnings were solid, but widely anticipated by the Street. Ford reported $0.46 vs. $0.44 that the consensus expected, however the Street whisper numbers went as high as $0.50. Revenues were stronger than anticipated at $33B, but a commodity hedge write-down of $350 million shrank margins, muting the impact of the higher revenue. Overall earnings were good, but as we anticipated, earnings were not the variable that would drive the short-term stock performance.

Dividend Plans Coming Into Focus

In our recent article "Will Ford And GM Announce Dividend Or Buyback Plans?" we were first in anticipating capital return to shareholders. We speculated:

At Ford, we would anticipate a slightly different path for return of capital to shareholders. Because Ford did not go through the taint of bankruptcy, they are closer to regaining their once blue-chip status. The one thing they lack at the current time is a dividend. Reinstating a dividend is the final step toward stabilizing their shareholder base and normalizing their reputation. We are confident management plans to reinstate a dividend in the near future, the only question is what quarter they announce it.

While Ford didn't announce a dividend, they did clearly commit to instituting one in the very near future. From CFO Lewis Booth on the conference call:

So we may decide to start a dividend before the rating agencies get us to investment grade. We don't have anything to announce today. But we're on record as saying we'd like to (be) paying a dividend sooner rather than later ...,

The dividend question became a central issue in the subsequent chatter surrounding the stock, and the investment community is close to recognizing the transition as inevitable. The lack of reaction in the short-run is normal because there is nothing concrete (yet), but investors would be wise to keep their eyes open.

Next Up: GM

General Motors (NYSE:GM) reports earnings on November 9th, and could still ignite the sector with its own capital return plans. Unlike Ford, we do not believe a dividend is likely for GM, rather we see a share buyback as the preferable alternative. Given the large government ownership still looming over GM's valuation, we believe the best use of excess cash is to assist in removing weak shareholders (first) and then the government (as the price approaches the $33 IPO level).

We recognize that GM returning capital may still be premature, however similar to Ford, we want to be prepared to the possibility. We expect GM to deliver solid earnings and revenues, but as argued in our article above, the market is widely aware of their incredibly good long-term valuation metrics. What the stock prices of GM and Ford are missing is a short-term catalyst that compels action by the Street.

Ford came close to delivering by the CFO's "sooner rather than later" dividend comments, but stopped short of the mark. GM is poised to provide the short-term spark for both companies fortunes, but must be specific about future capital return plans. To repeat what we stated earlier:

If either company does implement a dividend or stock buyback plan, it would indeed be viewed very favorably by the market. While we recognize that we may be looking a bit earlier than the rest, we also would point out that its not a question of "if" but rather a question of "when."

Keep your eyes open.

Disclosure: I am long GM.