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. To find out the sustainability of the dividend, there are only two things that investors should know, 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 payout with respect to earnings and 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 will be able to sustain the dividend payment even when sales or revenue has slowed down considerably.
In this article, we dive straight into the financial of the company to look at the earnings and free cash flow to find out how safe the dividend is 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 rooms to further increase the dividends in future.
Let’s sit tight and start the ball rolling!
Chart of GM Quarterly Dividend History
Before going into payout ratio analysis, we first look at General Motors dividend history. The chart above shows the historical dividend payout from the company over the previous 6 years from 2014 to 2019.
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. Here is an excerpt from the 2014 Annual Report:
“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 in 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.
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 2019.
For the 6-year period from 2014 to 2019, GM quarterly dividend has increased from $0.30 per common share to $0.38 per common share. The compounded growth rate (CGR) of the dividend is around 1% every quarter since 2014.
GM Dividend to Earnings Payout Ratio
The chart above shows GM quarterly dividend to earnings payout ratio for the past 6 years from 2014 to 2019.
The dividend to earnings payout ratio is the first variable that we talked about at the start of the article. It is an important variable that investors often use to find out how much percentage of earnings are paid out as dividend.
When analyzing the dividend to earnings payout ratio, the lower the payout ratio the better it is for the dividend as it indicates that the company has plenty of flexibility in increasing the dividend in the future.
For example, when a company has a 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. As a result, it is always preferable to have a low payout ratio.
A low dividend payout ratio relative to earnings most likely indicate that the company is very profitable and is having a very strong earnings. When this situation happens, the company will most likely, even in declining sales and revenue environment, continue dishing out dividend because of the strong earning power of the business. In other words, the profitable business allows the company to continue paying or even increase the dividend payout even when sales and revenues decline.
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 was the highest in 2014 when the ratio was more than 100% (capped at 100%). The ratio has dropped significantly in 2015 and reached the lowest point at about 10% in 4Q 2015. After that, the dividend payout ratio has stayed relatively constant at the 20% level from 2016 to 2019.
You may notice that the dividend payout ratio has gone to 0% in 3Q17 and 4Q17 respectively. The reason was that the earnings had been negative in both quarters. When a situation like this occurs, you will need to dig deeper to find out the reason of the negative earnings.
Nevertheless, GM dividend to earnings payout ratio had been quite healthy at the 20% level in recent quarters. Based on the chart above, the earnings to dividend payout ratio has consistently stayed at 20% from the end of 2018 to the latest quarter of Q3 2019.
The results show that General Motors not only has a very strong earnings to cover the dividend payment but also a large earnings margin to further increase the dividend in the future.
GM Cash Outflow for Dividend Payment
The chart above shows the amount of cash outflow for common stocks dividend payment disclosed in the quarterly filing. The numbers shown in the chart is the exact amount of cash that is being paid out by GM to common stockholders.
Why is the amount of cash being shown to readers you may ask? Well, dividends are actually paid out from the company cash reserve instead of from earnings. Here is a snapshot that shows the amount of cash paid as dividend in GM cash flow statement dated Q3 2019.
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 dividend payment for common stocks had been relatively stable. The plot shows that there had been a slight increase in cash outflow from 2014 to 2016 before declining slightly afterwards in 2019.
In 2014, cash used for dividend payment was around $480 million per quarter and the amount increased to nearly $600 million per quarter in 2016. After that, cash outflow had slowly decreased to $540 million in Q3 2019.
The reason for the decline in cash outflow for dividend between 2016 and 2019 had been due to General Motors buying back its own shares in the same period. 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 2019.
The following excerpt was taken from GM Q3 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 September 30, 2019.
The results show just how strong the business has been all these years, not only in making profit but also in free cash flow generation. Not only has the company increased the dividend payout but also managed to buy back its own shares.
GM Dividend to Free Cash Flow Payout Ratio
Another variable that measures dividend sustainability is the dividend to free cash flow payout ratio. We briefly mentioned this variable at the start of the article.
As discussed in prior paragraphs, dividend is actually paid out of cash instead of from earnings. For instance, GM may still be able to pay dividend out of its cash flow even when the company does not make a profit (negative earnings per share) during the financial period. In this case, GM has to be positive in cash flow. Otherwise, GM will be digging its cash reserve for the dividend payout.
On the contrary, it will be extremely difficult for GM to consistently pay dividend out of negative cash flow even when the company makes a profit (positive earnings per share). In this case, GM will be digging its cash reserve for the dividend payment as it has burned more cash than it has generated. The dividend will not be sustainable in the long run if the company keeps burning more cash than it can generate. Sooner or later, the company cash reserve will be used up, either for the dividend or for running the business.
This shows just how important cash flow analysis is for dividend payment. As a result, I have created the chart above that measures GM dividend to free cash flow payout ratio for the previous 6 years from 2014 to 2019.
Similar to dividend to earnings payout ratio, the lower the free cash flow payout ratio, the better the dividend is as it indicates the ability of the company to generate enough free cash flow to cover the dividend.
Coming back to the chart, it is showing General Motors quarterly common stock dividend to free cash flow payout ratio. Free cash flow is calculated by deducting capital expenditure and preferred shares dividend payout from total operating cash flow. The equation is shown below:
Free cash flow = Total operating cash flow – capital expenditure – preferred share dividends
Why operating cash flow? Operating cash flow measures the cash generated from GM core business operations such as from vehicles deliveries. In other words, if GM manages to generate plenty of free cash flow out of its main business activity, the company financial health should be sound and fine.
As seen from the chart above, the quarterly dividend to free cash flow payout ratio has fluctuated dramatically over the shown period. The highest ratio in the plot was nearly 80% whereas the lowest ratio was around 10%.
You may notice that some quarters were having 0% payout ratio. This figure means that free cash flow is negative in that particular quarter. In this situation, the company is short of operating cash flow to cover capital expenditure and preferred share dividends payment, let alone common stocks dividend payment.
We may not be able to derive any conclusion from the chart above as there is no obvious trend in the chart. As such, I have created two more charts below that show the annual dividend per common share and the annual dividend to free cash flow payout ratio.
Chart of GM Annual Dividend History
The chart above shows GM annual dividend payout for the past 6 years from 2014 to 2019. This chart is similar to the chart of quarterly dividend payout history where I have merged all quarterly dividends into yearly basis. You may find the yearly chart easier to read and digest as it’s much simpler to analyze.
Over the past 6 years, GM dividend has slightly increased from $1.20 per common share in 2014 to $1.52 per common share in 2018. The dividend has remained at $1.52 without further increment for quite some time since 2016. Let’s see if the company will increase the payout in 2019.
All in all, GM shareholders should be glad to know that the company has managed to continuously pay dividend over the 6-year period and has even slightly bumped up the amount.
GM Annual Dividend to Free Cash Flow Payout Ratio
The chart above shows the annual dividend with respect to free cash flow payout ratio. You may find that the plot is much simpler to read compared to the quarterly dividend to free cash flow payout ratio.
The reason for the simpler plot can be attributed to multiple quarters of negative free cash flow in the quarterly chart whereas the yearly chart has none of it.
Anyway, we can see that GM has successfully brought the yearly dividend to free cash flow payout ratio down significantly over the shown period. In 2014, the ratio was way more than 100%. During 2014, GM has not generated enough free cash flow to cover common stock dividend payout. However, things started to improve in 2015. The ratio dropped remarkably to a little less than 60% which means the company has plenty of 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. The ratio in 2019 has yet to be conclusive as only the first 9 months data is available but we can see that the ratio hovers around the 20% level which is considered reasonably healthy.
Overall, the trend of the dividend payout ratio has been trending downward which is a good sign. It shows that General Motors free cash flow has improved tremendously over the years and the company should have no problem covering the dividend payments now and in future with free cash flow when the ratio continues to stay healthily at this level.
In short, GM investors should be glad knowing that their dividends are safe and sustainable at current payout ratio, both earnings and free cash flow.
General Motors is an auto manufacturing company that pays a dividend on common stocks every quarter. The company has started paying dividend on common stocks since 2014 until now continuously. From the dividend history chart, the company has increased dividend payout by a CGR of roughly 1% per quarter from 2014 to 2019.
The dividend to earnings payout ratio is one important metric that measures the sustainability and ability of a company to continuously make dividend payment and to increase the payout. GM dividend to earnings payout ratio hangs around the 20% level in recent quarters, indicating that the company has plenty of flexibility adjusting its 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 dividend payments with respect to cash. In average, GM pays a little more than $500 million every quarter as dividend.
In terms of dividend to free cash flow payout ratio, GM managed to decrease the ratio significantly to its lowest level at roughly 20% and 30% respectively in 2017 and 2018, illustrating that the company core operation has been healthy and managed to generate plenty of free cash flow to cover the dividend payments. As such, GM dividend is pretty safe as of now and in future if both ratio, 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.