Can GM Afford to Slash Its Dividend? (GM)

| About: General Motors (GM)
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The Stalwart submits: The Wall Street Journal (sub. req'd) says that the generous dividend is one of the few reasons to own shares of GM, and that if they eliminate it many investors might flee the shares:

One of the last solid reasons to own shares of General Motors Corp. may soon vanish.

On Tuesday, investor Kirk Kerkorian's top lieutenant, Jerome York, urged the auto maker to slash its generous dividend, which amounts to a yield of more than 9%. The pressure from Mr. Kerkorian's camp, owners of 7.8% of GM's shares, comes on top of similar entreaties by the company's union to trim the dividend to save money.

Separately, some large holders of the auto maker's bonds -- whose credit ratings have been cut to below investment grade, or "junk" status -- are raising their own concerns about the dividend size and say they may do something about it.

"Even a 50% cut in the dividend doesn't go far enough. Companies hemorrhaging cash shouldn't be paying any dividend; there are better uses of their cash than giving it to shareholders and getting nothing in return," says Jonathan Glaser, who runs JMG Capital Management LLC, a $1.5 billion Los Angeles-based hedge fund that owns several hundred million dollars of the auto maker's bonds. "We intend to explore ways to make our opinions known inside GM."

We agree with Mr. Glaser, though we don't understand why the shareholders aren't on the same page. Paying a dividend isn't like printing free money. While the investors' stock-based income may go up, any further erosion of the balance sheet will affect the stock, canceling out that seemingly generous 9% yield. Given that the largest risk to both the bondholders and the stockholders is bankruptcy, there's no reason for either side to want the payout to continue.

Stockholders may argue that they need some compensation for the enormous risk they take in holding GM shares, but that risk is already reflected in the share price which allows them to buy the world's largest car company (still!) at a market cap of $12.11 Billion. If by God's will this company turns around, and even thrives, the payoff for GM shareholders will be enormous, with the bondholders seeing relatively little of the upside. It's true that the dividend itself, as stated in the article, is not a huge amount compared to the debt, but it is something, and at this point anything should help.