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How Safe Is GM Dividend?

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

General Motors (NYSE:GM) has been a dividend-paying company since 2014. Investors who have bought GM common stocks will receive the quarterly dividend payments from the company.

However, GM has temporarily suspended the dividends starting in 2Q 2020.

Here is an excerpt extracted from GM’s 2020 2Q quarterly filings regarding the dividends suspension:

  • In addition, we are restricted from paying dividends on our common shares if outstanding borrowings under the revolving credit facilities exceed $5.0 billion, with the exception of the three-year, $2.0 billion transformation facility.

GM currently has nearly $16 billion of borrowings under the revolving credit facilities which explains the reason that the company has suspended the quarterly dividend payout.

Aside from the dividend suspension, GM has also stopped executing its share buyback program due primarily to the excessive debt.

GM will probably reinstate the dividend payment in the coming quarters when it successfully reduces the borrowings under the revolving credit facilities to less than $5.0 billion.

Additionally, GM’s CEO Mary Barra has also stated that demand for the company’s vehicles is coming back quicker than she thought, according to Yahoo Finance.

As such, dividend investors who have been hoping for reinstatement of the dividend will likely hear good news in the foreseeable future.

Nevertheless, you will find that in the following analysis, GM’s dividend is still pretty safe although the company has temporarily suspended the payout.

Do note that GM suspended the dividend not because it can’t afford to dish out a dividend, but because of the debt covenants that restrict the company from doing so.

As of this article was published, GM’s dividend yield hovered around 3.6% from a trailing 12-months (TTM) standpoint, thanks to the plummeting GM’s stock price in recent months.

In this article, we will look at a couple of things related to GM’s dividend analysis such as the dividend historical yield, dividend payment history, payout ratio with respect to earnings and free cash flow, etc.

Let’s move on!

GM’s Historical Dividend Yield

GM dividend yield

GM dividend yield

The chart above shows GM’s historical dividend yield on a trailing 12-months basis.

Historically, GM’s dividend yield has been around 4.0% between 2014 and 2019.

Notice that GM’s dividend yield shot up to nearly 9% in 1Q 2020 which was when the COVID-19 first broke out, causing the GM’s stock valuation to plummet to a new low.

As of September 2020 or 3Q 2020, GM’s dividend yield hovered around 3.6%, which was slightly below its historical low, thanks largely to the depressed stock price of around $30 per share as well as the dividend suspension started in 2Q 2020.

GM’s Dividend Payment History

GM dividend payment history

GM dividend payment history

The chart above shows GM’s quarterly dividends 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 media and the quarterly amount remained unchanged at $0.38 per common share.

Prior to 2014, GM did not pay any dividends to common shareholders.

While GM has continuously paid dividends from 2014 until now, it’s no guarantee that the company will do so in the future.

The future dividend payment on common stocks is at the sole discretion of the Board of Directors of the company, meaning that General Motors may cut back on the payout or totally suspend it when it sees fit, just like what it has done during the COVID-19 crisis.

Here is an excerpt extracted from the 2014 Annual Report regarding GM’s 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.“

According to the chart above, GM paid a dividend of $0.30 per common share in every single quarter throughout 2014. In Q2 2015, GM bumped the dividend up to $0.36 per common share.

In Q1 2016, GM increased the dividend payout again to $0.38 per common share, which has since remained the same until 2020.

Historically, GM has been able to sustain the dividend payment over the 6-year period, and increased the payout 3 times in the last 6 years, 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.

In 2020, instead of increasing the dividend payout, GM has suspended the dividends altogether starting in 2020 2Q.

The suspension may last until the end of 2020 or even further into 2021, depending on the recovery to the company’s business operations disrupted mainly by the COVID-19 pandemic.

As you can see in the chart above, GM’s dividend payment in 2Q 2020 was reduced to $0.

GM’s Dividend Payment History (TTM)

GM dividend payment history (TTM)

GM dividend payment history (TTM)

From a trailing 12-months (TTM) basis, GM’s dividend payout increment was the most generous in 2015 when the TTM amount increased from $1.20 per annum in 1Q15 to as much as $1.52 per annum in 4Q16 in as few as 2 years.

The TTM dividend payout has since stayed the same from 2016 to 2020. However, the TTM amount decreased to $1.14 per common share starting in 2020 2Q, due primarily to the suspension which occurred in the same quarter.

GM’s Dividend to Earnings Payout Ratio

GM dividend to earnings payout ratio

GM dividend to earnings payout ratio

The next thing we will look at is GM’s dividend to earnings payout ratio which is shown in the chart above from 2014 to 2020.

The dividend to earnings payout ratio represents an important metric that investors often use to find out the portion of earnings per share that is being paid out as a dividend.

In the analysis of dividend to earnings 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.

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

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 a TTM basis, the chart above shows that GM’s dividend coverage with respect to earnings was the lowest in 2016 and 2019.

A negative figure or a ratio that exceeds 100% implies that the earnings were not sufficient to cover the dividend payout.

As of 2020 Q2, GM’s dividend to earnings payout ratio gradually exceeded 100% on a TTM basis, indicating that the company’s profitability fell short of the dividend payout.

In other words, GM failed to fully cover the dividend payment with its profits in 2020 Q2.

GM’s Cash Outflow for Dividend Payment

GM cash outflow for dividends

GM cash outflow for dividends

Cash is king when it comes to everything and that includes dividends, as dividends are literally paid out of cash.

The chart above shows GM’s cash outflow for dividend payments on a quarterly basis.

Accordingly, GM paid out roughly $550 million per quarter as dividends for common stocks.

Cash outflow for dividend payment suddenly came to a halt in 2020 2Q as shown in the above chart.

Understandably, the $0 cash outflow for dividends was mainly attributed to the dividend suspension which kicked in from 2Q 2020.

GM’s Cash Outflow for Dividend Payment (TTM)

GM cash outflow for dividends (TTM)

GM cash outflow for dividends (TTM)

On a trailing 12-months (TTM) basis, General Motors paid out more than $2 billion in cash outflow as dividends each quarter.

Due to the suspended dividend in 2020 2Q, GM’s cash outflow was reduced to $1.6 billion from a TTM standpoint.

GM Dividend to Free Cash Flow Payout Ratio

GM dividend to free cash flow payout ratio

GM 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 from 2015 to 2020.

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

Here is the equation I used to measure the data in the chart above:

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

As discussed, dividends are actually paid out of cash, particularly free cash flow, instead of earnings. For instance, it’s still possible for GM to pay out a dividend while it’s making a loss, ie. negative earnings per share.

GM will be able to pay out a dividend as long as the company is free cash flow positive. However, this scenario is not recommended in the long run.

On the contrary, it will be extremely difficult for GM to consistently pay dividends out of negative free cash flow even when the company is making a profit, ie. positive earnings per share.

A negative free cash flow scenario implies that 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 if it is determined to go ahead to pay out a dividend while having negative free cash flow.

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 be shouldering piles of debt.

According to the chart above, GM’s dividend coverage with respect to free cash flow was the highest back in 2015 when the ratio exceeded 100%, meaning that cash used for dividend payout exceeded the free cash flow.

The ratio gradually improved and headed to around 30% in 2019 before rising significantly to 74% in 2020 2Q on a TTM basis.

While the 74% ratio may seem high from a historical perspective, GM’s free cash flow was still more than enough to cover the dividends on a TTM basis.

Do note that GM has already suspended the dividends in 2Q 2020. If not for the suspension, the free cash flow coverage may exceed 100% in 2Q 2020, illustrating that the company did suffer from a drop in liquidity, brought about mainly by the COVID-19 disruption.

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.

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 seem insignificant, investors should be glad knowing that the company still managed to increase and continuously pay out the dividends despite facing multiple challenges in the automobile 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

Similarly, the chart above shows GM’s annual dividend coverage with respect to free cash flow.

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

In 2019, the ratio was at a historical low of 30%.

At a 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 with respect to free cash flow ratio low for multiple years.

Conclusion

In summary, GM suspended the dividends in 2Q 2020 out of excessive debt.

We do see that the company did have a liquidity drop in Q2 2020 as reflected by the unusually high payout ratio with respect to earnings and free cash flow on a TTM basis.

The suspension of the dividend in 2020 was probably the right thing to do for GM, considering that the company will retain roughly $500 million per quarter from dividend payout.

Is GM’s dividend still safe? Definitely. GM’s business has recovered faster than it thought and the temporary dividend suspension has brought some relieves to the company, free cash flow in particular.

Moreover, GM’s free cash flow generation has been relatively strong and will recover in the foreseeable future, driven largely by strong demand for automobiles.

My opinion is that once GM manages to reduce its borrowings under the revolving credit facilities, the company will resume the dividends payout in no time.

References and Credits

1. All information in this article was obtained and referenced from annual and quarterly filings available in 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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