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Next GM worry: Disappearing dividend
Analysts, union push automaker to stop paying $1.1B on shares. But will that sink stock further?
November 23, 2005: 12:45 PM EST
By Chris Isidore, CNNMoney.com senior writer
GM Chairman and CEO Rick Wagoner defended the sacrifices of GM shareholders, although he wouldn't comment on future dividend plans.
GM Chairman and CEO Rick Wagoner defended the sacrifices of GM shareholders, although he wouldn't comment on future dividend plans.

NEW YORK (CNNMoney.com) - Among the dark clouds hanging over General Motors' stock, add this question: How much of its already battered value is dependent on a dividend that few expect to continue at its current level?

GM (Research), struggling to trim billions in annual losses from its core North American auto operations, is paying shareholders $2 a year in dividends, costing the company about $1.1 billion. But many believe that when the next dividend checks are cut Dec. 10, they could be the last seen by GM shareholders for quite some time.

Even with a rebound in GM shares Wednesday on a strong outlook for its sales in China, the stock price has fallen about 50 percent in the last five months. That lifted the dividend yield to 8.45 percent -- by far the largest payout of any Dow Jones industrial average component. AT&T (Research), the recently renamed and merged SBC, is next highest with a 5.22 percent yield.

After announcing plans to close a dozen plants and facilities over the next three years, and cut more than 30,000 hourly and salaried jobs, the pressure is likely to increase on GM management to give up the dividend. Paul Krell, spokesman for the United Auto Workers, said union president Ron Gettelfinger wants GM to stop paying the dividend, "obviously in the context of the current financial situation and the sacrifices they're asking of hourly workers."

GM Chairman and CEO Rick Wagoner wouldn't comment directly on dividend plans during a press conference Monday to discuss the planned plant closings, although he did defend the decision to keep paying it.

"On the issue of the dividend, that call is made by the board on a quarterly basis, based on active discussions of all the relevant issues," said Wagoner.

Questioned about whether shareholders have shared any of GM's financial pain, something a dividend cut would accomplish, the CEO added, "If you had bought our stock at any time in the past 10 years, there's been a significant loss of value here recently....which we're very sensitive to and would like to get turned around."

But some analysts say that a dividend cut is all the more likely given both GM's financial problems and the demands it is making from its unions.

"We do expect GM to cut its $1.1 billion common stock dividend by more than half over the next twelve months," Bank of America auto analyst Ron Tadross wrote in a note last month. He has long had a "sell" recommendation on the stock.

"We have recommended this for years as a way to pay down debt, and think it would be a modest positive for the business," he said. "But, it is too little, too late, and may force some dividend income funds to sell the stock."

Fund selling seen

Josh Peters, a former auto analyst and the editor of Morningstar DividendInvestor, a newsletter for the mutual fund tracking service, said some of the dividend mutual funds will likely have to sell their GM shares soon given that the company's dividend payments will soon cross a threshold of 60 percent of cumulative recent earnings written into the funds' rules.

"They've said they've tried to set the dividend low enough not to cut it during the downturn," said Peters. "On the other hand, paying out $1.1 billion when you're bleeding cash at the rate that they are on their auto operations doesn't really make any sense. They've got a lot of other calls on their financial resources. GM isn't the kind of stock you're going to buy for the dividend, because you can't count on it being sustained."

David Healy of Burnham Securities said he thinks he market has already priced in an elimination of the dividend, and that the stock won't sink much further if GM cuts the payment to shareholders.

"It could even go up because it would show that management is in tune with reality," he said.

Peters said he wouldn't be shocked to see the stock rise on the elimination of the dividend, but he doesn't think it's likely. He estimates that there are more than a million shares of GM held in dividend-income mutual funds that could hit the market with the elimination of the dividend, or about 2 percent of shares outstanding. Beyond that, he said dropping the payment is still a bad sign for the stock.

"Even if people may not think the dividend is sustainable, when they cut it, that's management mailing it in on their prospects," said Peters. "Even though they don't have a lot of credibility with Wall Street, that acknowledgement from management would cause the stock to drop, I think."

And Peters said that eliminating the dividend will be another signal to investors about how little importance they have among GM decision makers.

"At GM, union concerns comes first, management's own interest comes first, suppliers come first, dealers even come first. Shareholders don't come first," he said.

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For a look at GM plant closing and staff cuts plans, click here.

For a look at the perfect storm of problems facing GM, click here.  Top of page

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