General Motors (GM +4.19%) stock was surging on Wednesday after the automaker surprised investors with a $10 billion accelerated share repurchase program and raised its dividend by 33% to $0.12 per quarter.
The automaker also reinstated its guidance after pulling it earlier during the United Auto Workers strike. It believes that the strike will cost it $1.1 billion in operating profit, primarily due to lost production. The company's now expects net income of $9.1 billion-$9.7 billion for the year, down from a previous range of $9.3 billion-$10.7 billion. On an adjusted earnings per share (EPS) basis, GM expects $7.20-$7.70 in profits for the year, compared to earlier guidance of $7.15-$8.15.
As part of the accelerated share repurchase program, the company said it would work with its banking partners to immediately repurchase and retire $6.8 billion worth of its stock, and it plans to finish the share repurchase program by the end of next year.
It's easy to see why investors are cheering. The dividend hike and aggressive share repurchase program are the kind of shareholder-friendly moves that typically elicit a warm response from the market, and the stock was also well positioned to benefit from such a move.
The 2024 Cadillac Celestiq. Image source: GM.
GM's hidden opportunity
Even after today's stock gains, GM shares trade at a forward price-to-earnings ratio of just 4.2 based on the revised guidance. That's the kind of valuation that's normally reserved for dying companies or is caused by a one-time boost in profits. Neither of those descriptions applies to General Motors, which remains a healthy business, though its industry is in the midst of an assumed transition to electrification, while autonomous vehicles are also expected to eventually disrupt the industry, though that could still be in the distant future.
Still, GM has prepared itself for these transitions, investing billions in its electric vehicle (EV) platform, and it acquired Cruise AV back in 2016.
CEO Mary Barra said she believes GM stock is undervalued, yet until now, the company has been reluctant to make the seemingly obvious moves to buy back its stock and raise its dividend. Over the last five years, shares outstanding declined only slightly, and the $10 billion share buyback is an important step toward correcting that.
Factoring in Wednesday's gains, the company now has a market cap of $43.3 billion, meaning that a $10 billion buyback would reduce its shares outstanding by 23%, lifting EPS by 30%. The immediate $6.8 billion repurchase will lower shares outstanding by 16%, increasing EPS by 19%.
Similarly, GM's dividend hike seems long overdue, but it increases the dividend yield only modestly, from 1.13% to 1.51%. Considering how cheap the stock is on a P/E basis, the automaker still has room to raise its dividend yield significantly.
NYSE: GM
Key Data Points
Is GM stock a buy now?
Even after the aggressive share buyback and dividend hike, GM still has a lot of room to pull those levers at the current stock price.
The company expects to generate $10.5 billion-$11.5 billion in adjusted automotive free cash flow this year. That cash is what's left over after funding the business, and it's typically used to pay down debt, acquire new business, and return to shareholders through dividends or share buybacks.
The $10 billion share repurchase authorization indicates that the company intends to favor share buybacks over dividends, as even after the dividend hike, it's allocating roughly only $650 million a year to dividends. If GM continues to prioritize returning cash to shareholders while the stock is this cheap, the share price should continue to move higher.
GM does face challenges, and Barra acknowledged as much in the update, noting that delays in the Ultium EV platform have been disappointing, and she promised to revamp its Cruise AV program after its vehicles were pulled off the road in California and Cruise CEO Kyle Vogt left the company.
However, no auto stock has an easy path to growth these days, as EV sales have slowed across the industry and high interest rates have pinched customers. Even Tesla has seen revenue growth slow to single digits and profits fall.
At its current price, GM stock looks like a smart buy. The core business continues to generate strong profits. It's adjusting its cost structure to absorb increased labor expenses after the strike, and it's making needed investments to prepare for the transition to EVs and autonomous vehicles.
GM stock is still an absolute bargain, and with its renewed focus on returning cash to shareholders, it's worth your investment dollars.
