I'm fairly certain every single one of you reading this remembers General Motors Company (NYSE:GM) going bankrupt during the recent recession, while crosstown rival Ford Motor Company (NYSE:F) scrambled to survive by taking its own loan out.
With that in mind, it puts in perspective the vast difference between these rivals' mind-sets. That was never more apparent than during Monday's GM conference call when it announced it would return $5 billion to shareholders in the form of a share repurchase program to be completed by the end of 2016.
Often, when these events happen it's worthy of a brief headline and a little celebration. This announcement however, is much, much more important for investors to question.
Show me the cash!
Some investors have grown wary of General Motors' initial plan to strengthen its "fortress balance sheet" and that could be one reason the stock is widely believed to trade significantly under its actual value -- investors don't want a pile of cash, they want it to be invested to create more value. With that train of thought it's easy to see why returning some of General Motors' more than $25 billion of cash to investors via an increased dividend, which was announced in February, and a large $5 billion share repurchase program, makes sense.
Essentially, with this move, General Motors is saying, "We have so much cash the best possible use of it is to dish it back to you all." General Motors notes that while it returns some $10 billion to shareholders through 2016, via both dividends and share buybacks, it will have plenty of cash reserves for potential economic downturns and can still aggressively spend on capex to further sales growth.
Sounds great, right?
As a shareholder I agree with GM needing to spend more of its cash pile, however returning it to shareholders in a share repurchase program might mean the automaker is getting slightly ahead of itself. Here's why, and some questions that investors should ask themselves.
Concerns and questions
Let's consider what Ford -- an automaker that reinstated its dividend two years before GM, but has yet to set a substantial share buyback program -- has done with its cash pile, rather than a share buyback program.
Consider that Ford poured $8.4 billion cash into its pension fund between 2012 and 2013. Most of that $8.4 billion was discretionary, and in combination with a rising discount rate, moved Ford's global pension obligation from a massive $18.7 billion at the beginning of 2012 to around $9 billion at the end of 2014 -- a huge improvement.
Meanwhile, General Motors isn't required to put cash into its underfunded pension plan for a few years, and management has noted it doesn't intend to make any discretionary payments. Because of that, General Motors' global pension fund was underfunded by a staggering $24 billion at the end of 2014 -- which is $4.3 billion worse than at the end of 2013.
Looking ahead, Ford plans on switching gears and slowing the pouring of capital into its pension fund and instead paying down its automotive debt. It expects to reduce its debt from $13.8 billion at the end of 2014 to $10 billion by 2018.
To put it bluntly, Ford is aiming to return value to shareholders down the line and in the short term is becoming a much stronger company by significantly reducing its pension and debt obligations. On the flip side, General Motors is sharing the wealth with shareholders while watching its underfunded pension status and debt move in the wrong directions. GM's debt increased from $7.1 billion at the end of 2013 to $9.4 billion at the end of last year.
Beyond this, there are other factors that investors should question amid GM's share repurchase announcement.
Everybody wants GM's cash
Not only are short-term investors loving the return value with GM's cash pile, it could send a very specific message to two entities: United Auto Workers and the U.S. Justice Department.
Consider that there will be year-long negotiations between UAW and Detroit automakers. What do investors expect the UAW to do when it sees GM is willing to share billions more of its cash with shareholders? It could absolutely give the UAW leverage in its negotiations and force GM to cough up more cash or bonuses for its union workers.
Also, at the same time GM is dishing more cash to shareholders, the IRS is planning to slap the automaker with a potentially substantial fine for its nearly 27 million vehicles recalled in the U.S. last year alone. In a similar event during 2011, Toyota was slapped with a more than $1 billion fine, and GM's is expected to be similar.
What's it all mean?
While I agree that GM's mountain of cash needed to be spent at a more rapid pace, I think focusing that spending on short-term priorities like a share repurchase program is much riskier for investors hoping GM is a big winner and will trounce the market over the next five years-10 years.
Between Ford and General Motors, one went bankrupt during the recent recession, and one didn't. Maybe investors of the formerly bankrupt General Motors should ask themselves why Detroit's largest automaker isn't putting its cash to use in a similar fashion as crosstown rival Ford.
Or perhaps, it's on us investors to decide what companies we invest in: businesses with short-term or long-term visions. Despite GM's recent success, we should also ask if the company has truly learned its lesson since the great recession.