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Why Shares of Goodyear Tire & Rubber Co. Jumped 10% in September

By Timothy Green – Oct 8, 2016 at 10:02AM

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The tire company has big plans for the next few years, including higher dividends and plenty of free cash flow.

Image source: Goodyear Tire & Rubber Co.

What happened

Shares of Goodyear Tire & Rubber Co. (GT 1.78%) rose 10.1% in September, according to data provided by S&P Global Market Intelligence. Positive analyst commentary and the company's updated guidance and capital allocation plans both played a role in the stock's rise.

So what

On Sept. 6, an analyst from Deutsche Bank upgraded Goodyear stock to buy, attaching a $37 price target. The analyst cited a defensive position, with 80% of revenue coming from tire replacement, and the expectation that the company would greatly increase its cash payouts to shareholders as reasons for the upgrade.

The analyst didn't have to wait long to be proven right. On Sept. 15, Goodyear provided a guidance and capital allocation update. The company is targeting $3 billion in segment operating margin in 2020, and aims to generate a total of $5 billion of free cash flow over the next four years. Goodyear also reconfirmed its 2016 financial targets.

On the capital allocation front, Goodyear raised its dividend by 43% as part of a $4 billion capital allocation plan. The company also plans to spend on growth capital expenditures, restructuring, and debt repayment as part of the plan. The new quarterly dividend of $0.10 per share gives the stock a dividend yield of 1.2%.

Now what

"Our capital allocation plan demonstrates Goodyear's commitment to creating value by maintaining financial flexibility to execute our strategic plan, continuing to strengthen our balance sheet and investing for future growth while also providing significant direct returns to shareholders," said Goodyear CEO and President Richard Kramer.

While Goodyear is still far from a great dividend stock, given the low yield, the big dividend increase coupled with the optimistic free cash flow guidance for the next few years managed to light a fire under the stock in September.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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