Strikes, new technology, new competition. It all conspires to keep a lid on the stock performance of
Ford Motor
and
General Motors,
the last two traditional North American auto makers. But there is a way to boost shareholder returns that has nothing to do with designing the next hit EV. The companies can afford to pay higher dividends.
The United Auto Workers won’t like it. The union is seeking a 30% raise over four years, and it has already taken issue with GM (ticker: GM) and Ford (F) returning cash to shareholders. “Over the last four years, [auto makers] have poured billions into stock buybacks and special dividends to enrich themselves,” UAW President Shawn Fain said in an address to membership on Sept. 8. The UAW launched strikes at GM, Ford, and
Stellantis
(STLA) plants after the labor agreement expired on Thursday at 11:59 p.m.
Fain is correct about one thing: Both companies pay dividends. That isn’t unusual for mature companies. What’s more, Ford and GM have returned less cash over the past few years compared with cash spent during the prior labor contract, due to the effects of Covid. Both companies halted dividends in 2020 amid global turmoil, though Ford resumed paying its quarterly dividend in 2021 at the prepandemic level. GM resumed payouts in 2022 but with a cut to nine cents a share from 38 cents.
GM has been more conservative for some time. Between 2019 and 2022, it spent about $3.6 billion cumulatively on dividends, down from about $9 billion between 2015 and 2018. Ford spent about $5.4 billion cumulatively on dividends between 2019 and 2022, less than half of the $11.2 billion it handed out between 2015 and 2018.
Neither company has a money problem. GM generated about $34 billion in adjusted free cash flow between 2019 and 2022, according to Bloomberg, compared with about $29 billion between 2015 and 2018. So GM paid out about 11% of adjusted free cash flow as dividends in the most recent four calendar years, down from 32% during the prior four-year span. For
S&P 500
companies, that ratio averages around 50%.
Ford generated about $38 billion in adjusted free cash flow between 2019 and 2022, with 14% of that paid out as dividends. That was after generating $40 billion in free cash flow between 2015 and 2018, with 28% paid out as dividends.
Looking ahead, Wall Street projects some mild profit deterioration for each, mainly because prices for new cars are expected to moderate from pandemic-induced highs. The change, though, isn’t dramatic.
In other words, GM and Ford could be paying larger dividends, even if they never pay out 60% or 70% of adjusted free cash flow, as some other mature companies do. The two do have to exercise some caution because the auto business is difficult and cyclical.
If GM returned to its old 38-cent quarterly rate, its stock multiple could climb from roughly five times earnings to somewhere near seven times, where Ford trades. That’s about a 40% improvement from recent levels. At seven times estimated 2024 earnings, GM stock would be worth roughly $47, and yield about 3% based on the larger payout. Shares currently yield 1.1%. Similarly, if Ford lifted its payout to 16 cents a quarter, the stock could climb to $21 or so, a jump of 65%. That would mean a yield of about 3%.
Getting to those numbers will require stable cash flows after current labor deals are wrapped up. With some care, the companies can make both their workers and their investors happy.
Write to Al Root at [email protected]
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