General Motors Company announced Monday that it will launch a $5 billion share buyback program and has tabled a capital allocation plan to return all available free cash flow to shareholders.
The auto giant has also struck a deal with an investor group to avert a proxy fight.
General Motors Company three-pronged capital allocation framework
GM unveiled Monday a capital allocation framework that encompasses three core principles. The firm said it will reinvest in its business with the objective of driving 20 or higher return on invested capital (ROIC), through investments in world-class vehicles and leading technology. General Motors Company intends to disclose its ROIC performance each quarter beginning with its first quarter 2015 report.
The auto giant also intends to maintain an investment-grade balance sheet, including a target cash balance of $20 billion. As part of its capital allocation framework, the company anticipates returning all free cash flow to shareholders. Moreover, starting in January 2015, the company will develop its annual capital return plans and communicate them to the market during the first quarter of each year.
General Motors Company to begin $5 billion stock buyback
The auto giant will also immediately begin buying back $5 billion worth of stock. The share repurchase, coupled with an additional $5 billion in dividend payments between now and 2017, is scheduled to conclude before the end of 2015.
The stock repurchase plan means avoiding a proxy fight with investor Harry J. Wilson. As reported by ValueWalk, Wilson, who is a retired hedge fund investor and a former senior adviser to the Obama administration’s auto task force that helped restructure the auto giant, sent a notice to the automaker indicating his intention to stand for election to become a member of GM’s board during its annual meeting. He also pushed the automaker to buy back $8 billion worth of its shares in one year.
Wilson told General Motors Company that he represented David Tepper and three other hedge fund managers that owned 2.2% of the outstanding shares of GM. David Tepper told CNBC:
Tepper on $GM:"Mary Barra is a pretty class act. It's been well-known that GM hasn't been the best allocator of capital over the years. MORE
— Scott Wapner (@ScottWapnerCNBC) March 9, 2015
More Tepper ".. and they showed today that have a comp scheme that's tied to allocating capital correctly and creating shrhldr value .. MORE
— Scott Wapner (@ScottWapnerCNBC) March 9, 2015
MORE Tepper: … and they made it transparent."
— Scott Wapner (@ScottWapnerCNBC) March 9, 2015
More Tepper on $GM: "It happened quickly because they were ready for it. They were on their way to this. We probably accelerated it."
— Scott Wapner (@ScottWapnerCNBC) March 9, 2015
Exuding confidence over the latest announcement, GM Chief Executive Mary Barra said in a statement: “GM is moving ahead with its comprehensive capital allocation framework and constructive dialogue with our shareholders has helped ensure that we are addressing these key initiatives with the appropriate level of clarity and transparency”.
Analysts from Barclays opined:
The company’s communication regarding capital allocation is what we had been hoping for (for several years). We believe that the hurdle for multiple expansion for Automakers is relatively high at this point in the cycle. While we continue to believe that GM’s profitability may be approaching a near term peak, we nonetheless believe that the company’s relatively low fixed cost positions them to be significantly cash flow generative over the intermediate term under a variety of different operating scenarios. Support for the stock is predicated on the company committing to returning cash to shareholders in a systematic manner, which the company is now doing.
