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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 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 4Q annual 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.

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

As bad as it may sound, GM has actually repaid all amounts drawn under the revolving credit facilities as of 4Q 2020 according to the 2020 annual filings.

In other words, General Motors may soon be a dividend payer again as early in 1Q 2021 since the company is no longer restricted by the debt covenants from paying out dividends on common stocks.

GM will probably reinstate the dividend payment in the coming quarter in 2021 Q1 since it has successfully reduced 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 the reinstatement of the dividend will likely hear good news in the foreseeable future.

While GM has repaid all its borrowings under the revolving credit facilities, the reinstatement of the dividends will still depend on other factors, including the recovery to its core businesses.

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 totaled less than 1% from a trailing 12-month (TTM) standpoint, thanks to the surging GM’s stock price and the suspension of the dividend payouts for the rest of 2020.

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-month 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 when the COVID-19 first broke out, causing GM’s stock valuation to plummet to a new low.

As of Feb 2021, GM’s dividend yield hovered less than 1%, which was slightly below its historical low, thanks largely to the continued dividend suspension and the surging stock prices which reached more than $50 per share.

GM’s Dividend Payment History – Quarterly

GM dividend history - quarterly

GM dividend history – quarterly

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 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 2021, depending on the recovery to the company’s business operations which have been negatively affected by the COVID-19 pandemic.

As you can see in the chart above, GM’s dividend payments in 2Q, 3Q and 4Q 2020 were totally down to $0.

GM’s Dividend Payment History – TTM

GM dividend history - ttm

GM dividend history – ttm

From a trailing 12-month (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 was down to only $0.38 per common share by 4Q 2020, due primarily to the continuous suspension which started in 2Q 2020.

No one knows when GM will reinstate the dividend payout for the rest of 2021. It could be as early as 1Q or as late as 4Q 2021.

But I remain hopeful that the company will soon be a dividend payer again, judging from the persistent recovery in the automotive sector which has resulted in a significant improvement in the company’s free cash flow.

In addition, GM has also managed to pay down all borrowings under the revolving credit facilities to less than $5 billion – a requirement for the company to pay dividends on common stocks.

GM’s Cash Paid for Dividends – Quarterly

GM cash paid for dividend - quarterly

GM cash paid for dividend – quarterly

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 or cash paid for dividends on a quarterly basis between 2014 and 2020.

Accordingly, GM paid out roughly $550 million in cash 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.

The quarterly cash paid for dividends continued to be $0 for the rest of 2020 as reflected in the chart above.

GM’s Cash Paid for Dividend – TTM

GM cash paid for dividend - TTM

GM cash paid for dividend – 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.

The decline in cash paid for dividends continued for the rest of 2020 and reached only $545 million as of Q4 2020 on a TTM basis.

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 for the period 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 general, it is always preferable to have a low dividend to earnings payout ratio.

The lower the ratio the better the dividend cover will be as it points to more flexibility in growing the dividend in the future.

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 between 2016 and 2019.

A negative figure or a number that exceeds 100% implies insufficient earnings for the dividend payout.

In 2020, GM’s dividend to earnings payout ratio gradually exceeded 100% on a TTM basis by 2Q 2020, indicating a declining company’s profitability that fell short of the dividend payout.

However, the earnings payout ratio reversed to a declining trend in 3Q and 4Q 2020, driven largely by smaller TTM dividend payouts in subsequent quarters instead of by surging profitability.

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 dividend metric that is as important as the earnings payout ratio is the dividend to free cash flow payout ratio.

The free cash flow (FCF) payout ratio measures the portion of 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 having little to zero profitability.

In other words, GM will still 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 be a dividend payer out of negative free cash flow while having 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 little to none in free cash flow.

Generally, using cash reserve to cover dividend payments 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 paid for dividends 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.

However, the FCF payout ratio declined in subsequent quarters in 3Q and 4Q 2020, due mainly to the declining TTM cash paid for dividends.

Chart of GM’s Annual Dividend History

GM annual dividend payout

GM annual dividend payout

The chart above shows GM’s annual dividend payout for the past 6 years from 2014 to 2020.

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.

Coming to 2020, GM’s yearly dividend has declined to only $0.38 due to the payout suspension which occurred since 2Q 2020.

For the last 6 years, the average growth rate for GM’s dividend is about -8% per annum, driven strongly by the latest slump in dividend payout.

While GM’s dividend growth may have tumbled in 2020, the company has managed to increase and continuously pay out the dividends since 2014 despite facing multiple challenges in the automobile industry.

GM’s Annual Dividend to Earnings Payout Ratio

GM annual dividend to earnings payout ratio

GM annual dividend to earnings payout ratio

On a yearly basis, GM’s dividend to earnings payout ratio has been quite steady from 2015 to 2019, hovering around 30%.

The earnings payout ratio tumbled to the negative territory in 2017 due to the negative earnings reported in the same year.

In 2020, the payout ratio plummetted to only 10%, giving out a wrong impression that the company has reported blockbuster earnings which led to the low payout ratio.

In reality, General Motors has actually reduced the cash dividend in 2020, causing the earnings payout ratio to significantly decline.

GM’s Annual Dividend to Free Cash Flow Payout Ratio

GM annual dividend to free cash flow payout ratio

GM annual dividend to free cash flow payout 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.

Since GM has suspended the dividend payment in most quarters in 2020, the payout ratio has dropped to a new low at 5%.

Keep in mind that investors should exercise caution when looking at the payout ratio.

While GM’s FCF payout ratio has reached a new low, it does not necessarily mean that the company has become a cash cow that generated enough free cash flow for the dividend payout.

In GM’s case, it simply means that the company has actually stopped paying the dividends, leading to the low FCF payout ratio.

Conclusion

In summary, GM suspended the dividends since 2Q 2020 due to the excessive debt that the company has taken on in the age of COVID-19.

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

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 trucks and SUVs since 3Q 2020.

As seen from the earnings and FCF payout ratio, GM’s numbers can reach below 50% for both ratios, suggesting the strong earnings power and free cash flow generation for the company.

The suspension of the dividends should only be temporary.

Once GM’s business is back on track, the company will most likely resume the cash dividends 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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