Late last week, General Motors (GM 0.18%) announced that it would start returning cash to shareholders for the first time since the COVID-19 pandemic hit in early 2020. GM's board approved a quarterly dividend of $0.09 per share, with the first payment scheduled for next month. More significantly, it topped up the company's dormant share repurchase authorization to $5 billion.
Despite maintaining a strong earnings outlook for 2022, GM stock has struggled this year. By resuming share repurchases in a meaningful way, General Motors will be able to capitalize on volatility in its share price to unlock even more upside for long-term investors. Let's take a look.
GM has been focusing on growth investments
In April 2020, General Motors suspended its dividend and its share repurchase program to conserve cash. The company had little choice, as it burned through $9.9 billion of cash in the first half of 2020 due to pandemic-related factory shutdowns and massive working capital headwinds.
In the second half of 2020, business recovered rapidly and the company's working capital headwinds started to reverse. As a result, GM ended 2020 with positive adjusted automotive free cash flow of $2.6 billion on a full-year basis. Despite new headwinds from the global semiconductor shortage, GM generated another $2.6 billion of free cash flow in 2021.
Even after free cash flow rebounded into positive territory, General Motors maintained its pause on shareholder distributions up until now. Instead, the auto giant paid down borrowings made early in the pandemic and began accelerating growth investments.
Just in 2022, GM has spent about $4 billion to increase its majority ownership stake in Cruise, its autonomous vehicle and robotaxi subsidiary. The company expects capital expenditures to rise to between $9 billion and $10 billion annually for the foreseeable future and is ramping up research and development spending, too. Much of this money is supporting the General's ambitious electric vehicle (EV) plans.
Deploying excess cash
While General Motors is ramping up spending, demand for its products (particularly high-margin full-size trucks and SUVs) has been running well ahead of supply. As supply chain constraints ease, the automaker is poised to generate a ton of free cash flow by meeting that demand and reducing working capital toward historical levels -- even as it continues to invest aggressively in its future.
Image source: General Motors.
GM's 2022 guidance calls for generating $7 billion to $9 billion of adjusted automotive free cash flow. Free cash flow totaled $1.4 billion in the first half of the year, so this forecast implies free cash flow production of at least $5.6 billion in the second half of 2022.
In other words, General Motors doesn't need to compromise on its investment plans to resume distributions to shareholders. The company's reinstated dividend will cost just over $500 million annually, a modest sum for GM. This suggests that GM will focus on stock buybacks as its main tool for returning cash to shareholders.
GM hasn't committed to completing the $5 billion share repurchase program in any specific timeframe. But barring another major supply chain setback, it should generate more than enough excess cash over the next 12 to 18 months to devote $5 billion to buybacks. Based on GM stock's current price, this would reduce the company's share count by more than 8%.
Capitalizing on the market's irrationality
At its investor day last fall, General Motors presented an ambitious roadmap for long-term growth. In addition to sustaining its leadership in the full-size truck and SUV market, GM hopes to become the top EV maker in the U.S. while scaling up a slew of new businesses in adjacent markets.
All told, GM estimates that it could double its revenue and expand its operating margin to a range of 12% to 14% by 2030. At the midpoint of this guidance range, the company would generate an annual operating profit of $38 billion by then.
Obviously, there's no guarantee that GM will hit these targets. But GM stock currently trades for less than six times earnings. That kind of valuation is consistent with a business in terminal decline. The market isn't giving GM credit for even having a chance of getting close to its long-term targets.
Given that GM is generating more cash than it needs to fund its investment plan, buying back stock makes sense right now. By reducing the share count while GM stock trades at a shockingly low valuation, the company will turbocharge its future earnings-per-share growth, adding to the stock's long-term upside potential.
