Kerkorian Takes GM Off-Road

I swear I'm not one to say, "I told you so." Not often, at least. But this time I can't help myself. There's an investing lesson involved.

Tuesday, a spokesman for billionaire investor Kirk Kerkorian, who owns a 7.8% stake in ailing General Motors (NYSE: GM  ) , said that the company ought to cut its dividend by 50%, which could save up to $566 million annually, according to Bloomberg.

Told you so.

The revelation was part of a specific set of recommendations offered by Kerkorian by way of his top adviser, John York, a former CFO for IBM (NYSE: IBM  ) . Among the others: cut annual compensation costs from an estimated $27 to $30 billion to $16 billion, and dump non-core brands such as Saab and Hummer.

But let's get back to the dividend. If my email inbox is any indication, those still bullish on GM will argue:

  • Kerkorian is a billionaire with an agenda.
  • Management has a vested interest in keeping the dividend as is, to keep investors happy and the stock from cratering.
  • GM's $53 billion in the bank will last decades.

At least one of these assertions is true: Kerkorian is a billionaire and he has an agenda. Well, actually, he has 1.7 billion agendas. (That's the size of his initial investment in the automaker, according to Bloomberg.) Besides, why wouldn't he? He's an investor. His goal is to make a profit. And his stake in the company is large enough to grant him a say in how GM creates value. Which, frankly, is great. Managers should be accountable to owners.

What about management's interest in maintaining the dividend, you ask? Well, nobody in the executive suite wants to see the stock crater or lose all its value in a bankruptcy filing. But don't let that (small-f) fool you into thinking that management would personally lose much were the dividend to be taken off the table.

Take CEO Rick Wagoner, for example. A check of the latest proxy filing shows that he made $4.6 million in salary and bonuses for all of 2004. Dividends, on the other hand, probably paid him roughly $286,000 over the same period, or 6% of his cash compensation (calculated by adding his direct holdings with those in trust, and then subtracting the 50,000 shares purchased in March -- that equaled 142,932 stubs paying $2 each.)

And the $53 billion cash cushion? Not enough, according to Kerkorian. His estimates suggest that GM is burning through $24 million in cash per day, and will run out in 1,000 days. Those may be aggressive estimates, however -- especially given Kerkorian's agenda. But probably not too aggressive. After all, GM blew through $4.6 billion in net cash in its last fiscal year, which amounts to more than $12.5 million per day. The automaker's business has worsened since.

All of which means, sadly, that while the dividend is the least of GM's problems, it's one that needs to go away -- now -- if bankruptcy is to be avoided.

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Fool contributorTim Beyersdrives a Mercury Mountaineer. Most days, at least. Tim didn't own stock in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking his Foolprofile. The Motley Fool has an ironcladdisclosure policy.


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