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General Motors (GM) announced a 25% dividend hike on Feb. 26 and a new accelerated share buyback program. Based on its historical yield, GM stock could be worth significantly more. Value investors love these shareholder-friendly moves.
GM stock is trading at $49.37 today. Based on its new 60-cent dividend, up 15 cents annually (i.e., a hike from 12 cents to 15 cents quarterly), GM stock could be worth $60.00 per share.
That is a +21.5% potential upside in the stock. This article will discuss why and what investors can look forward to with the buybacks.
Dividend Hike and Target Price for GM Stock
Value investors love seeing dividend hikes, especially a 25% rise like this one that GM just announced. Here is what the company said:
"DETROIT – General Motors (NYSE: GM) today announced that its Board of Directors has approved a $0.03 per share increase in the quarterly common stock dividend rate beginning with the next planned dividend,…"
Here is how that could affect GM stock: Based on its average dividend yield, using a 15-cent dividend per share (DPS) rate (up 3 cents from its existing 12-cent DPS rate), it looks undervalued.
For example, Morningstar data shows that over the last 3 years, the stock has had an average yield of 1.0%. But today, the new DPS rate (i.e., $0.015 x 4 = $0.60 annually DPS) implies a much higher yield going forward:
$0.60 DPS / $49.37 = 0.01215 = 1.215%
So, if GM stock were to maintain this average yield (i.e., at least some of the time with a higher yield, and some lower):
$0.60 DPS / 0.01 annual yield = $60.00 target price
In other words, at the 60 cents DPS rate, the stock will have a 1% yield if GM stock rises to $60.00 on average. That implies a +21.5% rise in GM stock from today's price.
Share Buyback Yield
On top of this, General Motors said it has started a new $6 billion share repurchase program. As part of this, it will do an “accelerated share repurchase” (ASR) worth $2 billion.
That implies that GM, if it does this over the next year, would repurchase 4% of its market value:
$2b / $49.03b mkt cap = 0.04079 = 4.1% buyback yield
In other words, the company could end up potentially reducing its share count dramatically over the next year. Let's say that the average price works out to $55.00 per share, or a market cap of $54.725 billion:
$55 price x 995 million shs o/s = $54.725b mkt cap
As a result, the buyback yield works out to:
$2b / $54.725b = 0.03655 = 3.66% buyback yield
That allows the company to increase its dividend per share next year without raising the cost of the dividend. Moreover, it increases each remaining shareholder's stake in the company.
For example, in the past two years, GM has reduced its outstanding shares by 400 million. That represented 29% of its total shareholding, which was 1.3946 billion at the end of 2022.
Can GM Afford This?
General Motors produced over $14 billion in automotive adjusted free cash flow during 2024. It spent just $534 million in dividends. With 995 million shares outstanding now the higher dividend will cost less than $600 million (and that's before buybacks):
995 m shares x 0.60 DPS = $597 m dividend cost
Moreover, last year GM spent $7 billion on share buybacks. But that is still only half of its free cash flow. And remember FCF is calculated after all the company capex spending. So, there is a huge possibility that all the $6 billion in buybacks could be done this year.
That would represent 12.2% of its existing $49 billion market cap. If that were to happen the total shareholder yield could be as almost 13.5%:
1.22% dividend yield + 12.2% buyback yield = 13.42%
Analysts Love the Stock
No wonder, then, value investors love GM stock. For example, Yahoo! Finance reports that the average of 28 analysts' price target is $59.99 per share, and Barchart's mean survey is $57.91 per share.
Moreover, AnaChart reports that 23 analysts that it covers who have recently written on the stock have an average price of $58.90 per share. AnaChart shows that many have recently raised their price targets, even before the recent shareholder-friendly dividend and buyback announcement.
These will act as catalysts, along with analysts' upgrades, that could help investors make money in GM stock over the next year.
