(Bloomberg) -- General Motors Co. offered a response to critics of its unsteady push into electric vehicles and self-driving: to shower shareholders with cash.
The automaker on Wednesday announced its biggest-ever stock buyback plan — $10 billion in total — as Chief Executive Officer Mary Barra promised better days are ahead. GM also boosted its dividend 33% and reinstated earnings guidance after accounting for costs of its new labor contract.
The Detroit-based manufacturer is returning billions to investors despite high interest rates that are threatening car sales and capital burdens from its EV effort, which has yet to show significant results. GM is trying to prove it can generate huge amounts of cash while still investing in technology, hoping to lift a stock that trades lower today than when Barra took over in early 2014.
Read More: Mary Barra’s $280 Billion Goal Is Proving a Stretch for GM
The announcements Wednesday sent GM’s shares soaring 12% to $32.29 shortly after the market opened in New York, the biggest intraday gain since April 2020. The stock fell 14% this year through Tuesday, compared with a 19% increase in the S&P 500 Index.
By returning more money to shareholders — including buying back about a quarter of the company’s market value — GM is effectively telling investors that it’s going to be more of a value play than a growth investment. While revenue is rising this year, GM is getting its growth from its legacy business of gas-powered automobiles. EV sales have been minimal and its robotaxi business is troubled.
“We have confidence in the cash generation of this company,” Barra said on Bloomberg TV. “We’re demonstrating the confidence that we and the board have that we’re executing the strategy and we’re going to see growth and strong margins.”
GM said costs from the new labor contract amount to about $575 a vehicle. While rival Ford Motor Co. has pegged the per-car cost of its United Auto Workers deal at about $850 to $900, GM is the first of the legacy Detroit automakers — which also includes Stellantis NV — to offer a detailed breakdown of the expected impact of the contract.
Barra pledged to “fully offset” added labor expenses and other outlays through greater efficiencies and largely unspecified cuts to fixed and variable costs in next year’s budget. She expects GM to lower its costs without resorting to job cuts, particularly after the company’s recent efforts to trim headcount.
“We believe with what we did, in the voluntary separation program earlier this year, we’re well-situated there,” Barra said in an interview. “Of course we give our leaders the broad responsibility and autonomy to be able to right-size their business. But we don’t have anything planned, like a major layoff.”
GM will raise the quarterly dividend 3 cents a share to 12 cents beginning in 2024.
Under the advanced share repurchase plan, GM will pay $10 billion to a group of executing banks and immediately receive and retire $6.8 billion worth of common stock. The company had approximately 1.37 billion shares of common stock outstanding prior to the buyback.
The total number of shares repurchased will be based upon final settlement and the daily volume-weighted average prices of GM common stock during the term of the program, which will conclude in the fourth-quarter of 2024. The repurchase program will be executed by Bank of America Corp., Goldman Sachs Group Inc., Barclays Bank PLC and Citigroup Inc.
GM will have $1.4 billion of capacity remaining under its share repurchase authorization for additional buybacks.
The buyback plan is opportunistic given the recent slide in GM’s share price, RBC analyst Tom Narayan said in a note. Still, investors remain largely focused on expectations for 2024, he said.
Read More: GM Gains on Dividend Boost, ‘Substantial’ Buyback
The size of the repurchase effort may rankle the UAW, whose president, Shawn Fain, has criticized GM for buying back shares over the past decade while offering smaller raises to its hourly employees.
The automaker reinstated 2023 earnings guidance to levels modestly below what it gave before a six-week UAW strike cut into profits. GM said net income will now be between $9.1 billion and $9.7 billion, compared with a previous range of as much as $10.7 billion. During the strike, the company withdrew guidance.
Earnings per share will be $6.52 to $7.02 including the estimated impact of the buyback. That compares to a previous forecast for $6.54 to $7.54 a share.
Not counting the costs of the buyback program, GM’s adjusted EPS guidance is between $7.20 and $7.70 a share, down from a top estimate of $8.15.
GM said the new UAW contract — which gives workers minimum 25% raises along with cost-of-living allowances and other improved benefits — will add $9.3 billion in expenses over the 4-year, 8-month term, with new labor expenses peaking at $2.5 billion in 2027.
To help offset the impact, the company said it will reduce fixed costs by $2 billion next year, achieving new efficiencies in design, engineering, manufacturing, marketing and distribution of its models and replacing some of its older SUVs with more profitable versions of those models.
What Bloomberg Intelligence Says:
“The move to offset the effects of higher costs from the new UAW contract adds confusion to GM’s electrification strategy and is out of step with the practice of conserving cash when demand is uncertain.”
— Kevin Tynan, transportation analyst
Click here to read the research
GM also inked a new delayed-draw term loan agreement that allows it to borrow four term loans that can’t exceed the amount of $3 billion, according to a filing. GM expects to use proceeds to finance working capital needs and for general corporate and entity purposes, including to enable it to make valuable transfers to any of its subsidiaries in connection with the operation of their respective businesses. The loan agreement expires in a year, meaning GM will have to issue new debt in the investment grade market in order to refinance.
Its stock has struggled in part because investors saw the strike resulting in higher labor costs. But there’s also an existential issue for GM and other legacy automakers. The internal combustion vehicle business is seen as being in a slow long-term decline, while none of the old-line carmakers have successfully sold EVs at large enough volume to keep up with Tesla Inc.
Under Barra, GM has achieved record profits but trouble at its battery pack facilities has kept EV production in the low thousands, while Tesla’s annual sales approach 1.8 million vehicles. GM’s Ultium battery pack was supposed to enable the company to make multiple types of electric cars off the same platform and beat competitors to market with a panoply of vehicles.
Barra said GM should have its electric battery and vehicle production issues fixed by mid-2024. EVs are a big piece of the automaker’s strategy to double sales to $280 billion by 2030.
“Although I am disappointed with our Ultium-based EV production in 2023 due to difficulties with battery module assembly, we have made substantial improvements both to the process and to the organization responsible for this work,” Barra said in a shareholder letter. “In 2024, we expect significantly higher Ultium EV production and significantly improved EV margins.”
GM is also cutting spending on Cruise LLC, its San Francisco-based self-driving car unit. The robotaxi company last month suspended operations after one of its vehicles dragged a pedestrian for 20 feet. The unit’s CEO, Kyle Vogt, stepped down abruptly earlier this month.
Read More: Cruise CEO Vogt Resigns at GM’s Troubled Self-Driving Car Unit
Cruise was costing the company $700 million a quarter before GM grounded its fleet and pulled back its growth strategy. GM Chief Financial Officer Paul Jacobson said on a conference call Wednesday that spending on Cruise would decline by hundreds of millions of dollars.
Cruise is cutting back its presence to one city from three previously, laying off workers and focusing on making sure the technology is safe.
--With assistance from Jonathan Ferro, Catherine Larkin, Shelly Banjo and Josyana Joshua.
(Updates to recast first paragraph, add CEO comment in the sixth paragraph)
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