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How Safe Is GM Dividend?

GMC 2020 Terrain SUV. Source: www.gmc.com

General Motorst (NYSE:GM) is one of the major automobile manufacturers in the world. The company is a dividend paying company which has been continuously paying dividend since 2014. Investors who have bought GM common stocks will receive the quarterly dividend payments from the company.

In general, GM dividend investors are interested to find out how safe the dividend is and whether the company can sustain the dividend payout in the long run even during bad times when business environment deteriorates. Before going into that, let’s take a look at the dividend yield. GM’s dividend yield has shot up to 6.6% as of the date this article was published. Thanks to the plummeting GM’s stock price in recent weeks.

However, a high dividend yield does not necessary mean that the stock is a good buy and more importantly, the dividend payment will be sustainable. The reason is that the company may cut back on its dividend payout when the company is low on cash or is having liquidity issue.

As a result, investors need to be prudent especially in times of falling stock prices and thinks that the company is a good investment. To find out how sustainable the dividend is or if the company has difficulty in paying out dividends, there are only two things that investors should investigate, namely:

(1) Dividend payout ratio with respect to earnings, and
(2) Dividend payout ratio with respect to free cash flow.

Both ratios above analyzes the dividend cover with respect to earnings and free cash flow of the company.

Of course, the business prospect of the company is important too in the analysis of the safety of the dividend. When sales or revenue is slow, dividend payment from the company might be affected and there might even be a cut in dividend if business deteriorates seriously.

But a business with strong earnings and free cash flow generation will be able to keep the dividend payment uncut and may possibly bump up the payout in future even when sales or revenue has slowed down considerably.

In this article, we will dive straight into GM’s financial to look at the company’s earnings and free cash flow to find out how safe the dividends are with respect to these variables.

From analyzing the earnings and free cash flow, we can find out the state of the business and to assess whether GM has any wiggle rooms to further increase the dividends in future.

Let’s sit tight and read on!

Chart of GM’s Quarterly Dividend History

GM quarterly dividend payout

GM quarterly dividend payout history

Before going into payout ratio analysis, we first look at General Motors dividend history. The chart above shows the historical quarterly dividend declared and paid over the previous 6 years from 2014 to 2020.

The most recent one was declared on Q1 2020 and payable on March 20th, 2020 according to GM’s latest media and the quarterly amount remained unchanged at $0.38 per common share.

Prior to 2014, GM did not pay any dividend to common shareholders. Even though GM has continuously made dividend payment from 2014 until now, it’s no guarantee that the company will make any dividend payment in the future. The future dividend payment is at the discretion of the Board of Directors of the company, meaning that the company may cut back on payout when it sees fit.

Here is an excerpt from the 2014 Annual Report regarding dividend policy:

“Since our formation, we had not paid any dividends on our common stock through the year ended December 31, 2013. Beginning in the first quarter of 2014 our Board of Directors declared, and we paid, quarterly dividends on common stock in the amount of $0.30 per share. It is anticipated that dividends on our common stock will continue to be declared and paid quarterly. However our payment of dividends in the future, if any, will be determined by our Board of Directors and will be paid out of funds legally available for that purpose. Our payment of dividends in the future will depend on business conditions, our financial condition, earnings, liquidity and capital requirements and other factors.“

In 2014, the company paid a dividend of $0.30 per common share on every single quarter throughout the year. In Q2 2015, GM has bumped the dividend up to $0.36 per common share. In Q1 2016, GM has increased the dividend again to $0.38 per common share.

From the historical data, it looks like GM has been able to sustain the dividend payment over the 6-year period, and increased the payout 3 times during the same period, even though the last increment occurred almost 4 years ago in Q1 2016 and the rate of increment was only 6%.

Since then, GM has yet to increase the payout and has maintained a dividend payment of $0.38 per common stock throughout all the quarters from 2016 to 2020.

Over the 6-year period from 2014 to 2020, GM quarterly dividend has increased from $0.30 per common share to $0.38 per common share, representing a compounded growth rate (CGR) of roughly 1% every quarter since 2014.

GM’s Dividend to Earnings Payout Ratio

GM dividend to earnings payout ratio

GM quarterly dividend to earnings payout ratio

Next thing we look at is the GM’s quarterly dividend to earnings payout ratio which is shown in the chart above over a 6-year period from 2014 to 2019.

The dividend to earnings payout ratio is the first metric that we talked about at the start of the article. It represents an important metric that investors often use to find out the portion of earnings per share that is being paid out as dividend.

When analyzing the payout ratio, the lower the ratio the better the dividend cover will be as it indicates that the company has plenty of flexibility in bumping up the dividend in the future. The assumption here is that the company can sustain the same earnings power in future.

For example, when a company has an earnings per share of $1.00 and its respective dividend payment is $0.40, the resulting dividend to earnings payout ratio will be 40%. In this case, the company is paying out 40% of its earnings as dividend.

For a company with relatively strong earnings power, even when its earnings per share drop 20% to $0.80 due to bad business condition, the company will most likely keep its dividend payout uncut as the ratio is only at 50% and there is still plenty of rooms in earnings being paid out as dividend.

As a result, it is always preferable to have a low dividend to earnings payout ratio.

To make long story short, the formula that I used to calculate the dividend to earnings payout ratio is shown below:

Dividend to Earnings Payout Ratio = (Dividend Per Share / Diluted Earnings Per Share) X 100%

From the chart above, GM dividend to earnings payout ratio had been the highest during 2014 when the ratio was more than 100% (capped at 100%) for the first two consecutive quarters. A ratio that is more than 100% implies that dividend payout has basically exceeded the earning per share which means GM has paid out its entire earnings as dividends. This scenario is not sustainable in the long term.

Fortunately, the dividend payout ratio dropped significantly in 2015 and reached the lowest at 10% in 4Q 2015. Since then, the dividend payout ratio has stayed relatively stable at the 20% range from 2016 to 2019.

From 2016 to 2019, there were some quarters when the ratio has gone all the way to 0% such as in 4Q 2019. The reason for the 0% ratio was that earning per share had gone negative in that particular quarter. When a situation like this occurs, investors are highly encouraged to dig in to find out the reason of the negative earnings.

In general, investors need to know whether the negative earning is a one time event or a fundamental issue that will usually last a few more quarters or more. For instance, GM’s earning per share in 4Q 2019 has gone negative, implying that the company did not make a profit in that particular quarter.

Yet, the company continued to declare and pay a quarterly dividend of $0.38 per common share in 4Q 2019 even though it didn’t make any money. A thorough investigation of GM’s financials revealed that the negative earnings in 4Q 2019 was largely caused by the UAW strike which had badly affected vehicle production in 4Q 2019.

Here is a quote from GM’s financials which details the UAW strike:

“Our collective bargaining agreement with the UAW, which was ratified in November 2015, expired on September 14, 2019. The UAW went on strike on September 16, 2019, causing subsequent stoppages to most vehicle production and parts distribution across our North America facilities. On October 25, 2019, the UAW ratified a new collectively bargained labor agreement (Labor Agreement). The Labor Agreement, which has a term of four years, covers the wages, hours, benefits and other terms and conditions of employment for our UAW-represented employees.“

Here is another quote from the financials which explains the impact of the UAW strike on the company’s earnings and cash flow:

“We estimate that the lost vehicle production volumes and parts sales due to the UAW strike had an unfavorable impact of approximately $3.6 billion on our GMNA EBIT-adjusted in the year ended December 31, 2019. In addition, we estimate an unfavorable pre-tax impact to Net cash provided by operating activities in our consolidated statement of cash flows of approximately $5.4 billion in the year ended December 31, 2019.“

In short, the respective negative earnings per share was basically a one-time event due to employee strikes which GM had successfully resolved by ratifying a new labor agreement with UAW in Q4 2019. The event was generally not related to any fundamental issue of the company which would usually last longer than just one quarter.

While there is no guarantee that this type of event won’t happen again in future, investors are advised to dig in the financials and investigate should there be a drop in earning per share in future. In this particular case, investors should be glad knowing that GM’s dividend payout will not be affected in any way once the company resumes vehicle production and continues operating its business as usual.

Coming back to GM’s current chart, GM’s dividend to earnings payout ratio had been quite healthy at the 20% level in recent years, indicating that the company should be able to keep its dividend payout uncut.

Ruling out the one-time event which occurred in 4Q 2019 and a couple more in 2017, GM’s quarterly earnings to dividend payout ratio has consistently stayed at the 20% range from 2016 to 2019, implying that the company not only has a very strong earnings to cover the dividend payment but also a large earnings margin to further increase the dividend in future.

GM’s Cash Outflow for Dividend Payment

GM cash outflow for dividends

GM quarterly cash outflow for dividends

Another chart that we will look at is the cash flow for dividend payment which is shown above over a 6-year period from 2014 to 2019.

The current chart shows the amount of cash outflow for common stocks’ dividend payment disclosed in GM’s financials. The numbers shown in the chart is the exact amount of cash that has been paid out by GM to stockholders throughout all the quarters.

Why cash flow you may ask? Well, dividends are actually paid out from cash instead of from earnings. Here is a snapshot that shows the amount of cash paid as dividend in GM’s cash flow statement dated Q3 2019.

GM cash outflow for dividend

GM cash outflow for dividend in the statement of cash flow

The above snapshot shows that a massive $1.8 billion of cash has been paid as dividend (both preferred and common shares combined) for the 9 months ended on September 30, 2019.

As seen from the chart, over the past 6 years from 2014 to 2019, cash used for quarterly dividend payment for common stocks had been relatively stable. The plot shows that there had been a slight increase in quarterly cash outflow from 2014 to 2016 before declining slightly in 2017.

In 2014, cash flow for quarterly dividend payment was around $480 million and the amount increased significantly to $600 million in 2016. However, quarterly cash outflow came back down to $540 million in 4Q 2017 and had stayed in the same range all the way to 4Q 2019.

The explanation for the decline in cash flow for dividend between 2016 and 2018 was attributable to General Motors’ share buyback initiative. As a result, the company has managed to maintain the dividend per share without significantly increasing its cash outflow. In fact, quarterly cash outflow has even declined slightly from 2016 to 2017 because of the declining number of common stocks.

The following quote was taken from GM’s Q4 2019 quarterly filing and shows the shares buy-back disclosure in the financial statement.

In January 2017 we announced that our Board of Directors had authorized the purchase of up to $5.0 billion of our common stock with no expiration date as part of our common stock repurchase program. We have completed $1.6 billion of the $5.0 billion program through December 30, 2019.

While GM has only bought back $1.6 billion out of the approved $5 billion of shares, the result has been enough to make a difference to the amount of cash outflow for dividend which is seen in the chart above. I believe the company will most likely initiate more share buyback in the current environment when its share price has plummeted to its lowest in recent weeks.

The cumulative efforts of share buyback and dividend payout increment show just how strong GM’s business has been all these years, not only in making profits but also in free cash flow generation.

The company has not only paid out a portion of its cash as dividend but also invested a large sum in new technology such as autonomous driving and vehicle electrification.

This is no easy feat for a company like GM whose business model has been both capital intensive and asset heavy and yet, be able to return a portion of profits to shareholders in the forms of dividend and share repurchase and at the same time, invested in new technology.

GM Dividend to Free Cash Flow Payout Ratio

GM dividend to free cash flow payout ratio

GM quarterly dividend to free cash flow payout ratio

Another metric that measures dividend sustainability is the dividend to free cash flow payout ratio which is shown in the above chart over a 6-year period from 2014 to 2019.

This metric measures the portion of free cash flow (FCF) that is being paid out as dividend. Similarly, the lower the ratio, the better the dividends cover will be with respect to free cash flow.

Here is the equation I used for the data in the chart above:

Dividend to FCF Payout Ratio = (Cash Outflow for Dividend / FCF) X 100%

As discussed in prior paragraphs, dividend is actually paid out of cash instead of from earnings. For instance, it’s still possible for GM to make the dividend payments even when the company does not make a profit (negative earnings per share).

While GM may be making a loss in a particular quarter, it’s still possible for the company to generate positive free cash flow. In these rare quarters, GM will still be able to cover the dividend payment with its free cash flow. Of course, it’s not in the best interest of the company to continuously having losses. Sooner or later, the company might fail to generate any positive free cash flow and be forced to dig into its cash reserve for the dividend payments.

On the contrary, it will be extremely difficult for GM to consistently pay dividend out of negative free cash flow even when the company makes a profit (positive earnings per share). In this case, the company is actually spending more cash than it can generate and has nothing left for dividends.

Again, GM will be digging into its cash reserve to cover the dividend payment. Generally, using cash reserve to cover dividend payment is not highly recommended as eventually the company’s cash reserve will dry up and the company will most likely cut the dividend to nothing.

In any case, whether positive earnings per share or negative free cash flow, the dividend payout will not be sustainable in the long run. Most importantly, the company must be able to generate positive free cash flow in order to cover the dividends, no matter what the earnings are.

The respective discussion shows just how important free cash flow analysis is for dividend payment. As such, I have created the chart above to show GM’s dividend cover with respect to free cash flow.

As the chart shows, the quarterly dividend to free cash flow payout ratio has fluctuated dramatically over the shown period. Some quarters recorded a ratio that is as high as 78% whereas some ratio are as low as 10%.

Similarly, a ratio at 0% means negative free cash flow in that particular quarter. In this situation, the company has failed to generate enough operating cash flow to cover capital expenditure and preferred share dividends payment, resulting in negative free cash flow.

You may notice that some quarters with 0% ratio in the previous dividend to earnings payout ratio chart have actually exhibited positive dividend to free cash flow payout ratio in the current chart. As discussed previously, it’s possible for GM to have negative earnings while having enough positive free cash flow to cover the dividends.

This scenarios occurred in 4Q 2019 when GM recorded a 0% dividend to earning payout ratio but the respective dividend payout was 76% of free cash flow. This is an example of GM making a loss while having enough free cash flow to cover the dividend.

Nevertheless, the current chart failed to generate a trend for GM’s dividend cover relative to free cash flow. As such, I have created two more charts below that recorded the annual dividend per common share and the annual dividend to free cash flow payout ratio.

Chart of GM’s Annual Dividend History

GM annual dividend payout history

GM annual dividend payout history

The chart above shows GM’s annual dividend payout for the past 6 years from 2014 to 2019. This chart is similar to the quarterly dividend chart except that I have merged all quarterly dividends into yearly basis in current chart. You may find the yearly chart easier to read and digest as it’s much simpler to analyze.

As seen from the chart, GM’s annual dividend has slightly increased from $1.20 per common share in 2014 to $1.52 per common share in 2016. However, the dividend has remained unchanged at $1.52 per common share from 2016 to 2019.

The compounded annual growth rate (CAGR) of GM’s dividend growth for the previous 6 years is roughly 5% per annum from 2014 to 2019.

While GM’s dividend growth rate of 5% may not be that significant, investors should be glad knowing that the company still managed to increase and continuously pay out the dividend even though facing multiple challenges in the automotive industry.

GM’s Annual Dividend to Free Cash Flow Payout Ratio

GM annual dividend to free cash flow ratio

GM annual dividend to free cash flow ratio

The chart above shows GM’s annual dividend cover with respect to free cash flow. You may find that the current chart much simpler to read compared to the quarterly chart.

As seen from the chart, GM has managed to successfully bring the annual dividend to free cash flow payout ratio down significantly over the 6-year period from 2014 to 2019.

In 2014, the dividend to FCF payout ratio was way above 100%, implying that GM’s dividend payout has exceeded the generated free cash flow. However, things started to improve in 2015. The dividend cover ratio dropped remarkably to a little less than 60% which means the company has managed to generate enough free cash flow to cover the dividend payment.

Since 2015, the yearly dividend to free cash flow payout ratio continued to trend lower and hit the lowest level at slightly more than 20% in 2017 before bouncing higher to 30% in 2018. In 2019, the ratio has stayed roughly at the same range at 30%.

At 30% ratio, GM’s dividend has consumed only 30% of free cash flow, leaving plenty of free cash flow for other purposes. The results show that GM has been a powerful cash generating machine and has managed to keep the dividend cover to free cash flow ratio at below the 40% threshold for multiple years.

At this ratio, the company should have no problem not only in paying the dividends but also in increasing the payout in future if the current trend can continue without significant surprises.

Nevertheless, investors are highly recommended to keep track of both quarterly and annual ratio from time to time to rule out any possible business conditions that may affect the company’s ability not only in generating free cash flow but also in making a profit.

As of this article was published, GM investors should find peace of mind knowing that their dividends are safe and sustainable at current payout ratio, with respect to both earnings and free cash flow.

Conclusion

General Motors (NYSE:GM) is an automobile company that has paid dividends on common stocks continuously every single quarter since 2014. The most recent cash dividend payment, declared in Q1 2020 and payable on March 20th, 2020, was $0.38 per quarter or $1.52 per annum.

From the dividend history chart, the company has increased the dividend payout by a CAGR of roughly 1% quarterly or 5% annually from 2014 to 2019.

GM’s dividend to earnings payout ratio is one important metric that measures the company’s dividend per share with respect to earnings and how much of that profits are being paid out as dividends.

Excluding the one-time event for quarters with negative earnings, GM’s quarterly dividend cover with respect to earnings has hovered around the 20% range from 2016 to 2019, implying that the company has plenty of flexibility adjusting the payout including bumping the dividend up in future.

Dividend is paid out of cash instead of from earnings. Therefore, cash outflow for dividend is plotted to show GM’s dividend payments with respect to free cash flow. In average, GM paid out cash totaled as much as $540 million every single quarter as dividends.

Finally, the annual dividend to free cash flow payout ratio shows that GM has managed to decrease the ratio significantly to its lowest level at 30% in 2019, leaving plenty of free cash flow on the table to cover future dividend payments and for other purposes.

In summary, GM dividend is pretty safe as of now and in future if both ratio, with respect to earnings and free cash flow, continues to stay healthily at current level.

References and Credits

1. All information in this article was obtained from GM Shareholder Information.

2. Featured images in this article are used under creative commons license and sourced from the following websites: GMC.

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