DETROIT (WWJ) – General Motors has agreed to buy back $5 billion worth of its own stock, ending a dispute with a group of activist shareholders. The company also promising to share more of its cash stockpile with investors.
“A foundational element of our approach will be to return all available free cash flow to shareholders, while we maintain an investment grade balance sheet that is underpinned by a target cash balance of twenty billion,” said GM CEO Mary Barra.
Barra said the twenty billion dollar cash flow will be enough to fund General Motors operations and expansion plans, while also having a cash cushion to deal with any future economic downturns.
A group of activist shareholders had been seeking to have GM buy back eight billion dollars worth of shares, and to have former Auto Task Force member Harry Wilson join the board. As part of the deal, Wilson agreed to drop his plans to run for a board seat.
“Today’s announcement by General Motors represents the culmination of a constructive dialogue between our investor group, senior management and the Board,” said Wilson. “As a result of this dialogue, we have arrived at a win-win outcome that includes a thoughtful approach to critical capital allocation issues and other important measures to increase long-term shareholder value.”
Companies traditionally buy back shares of stock as a way to reward stockholders. It helps share earnings, and also — with fewer shares of stock on the market — tends to increase the price of an individual share.
“I think GM is recognizing that their security is undervalued,” said Loomis-Sayles portfolio manager David Sowerby. “I think more than anything it’s a conviction in the long term potential for GM stockholders.”
It’s always a balancing act, says Sowerby, as companies work to reward shareholders, but have a secure amount of cash on hand.
“This is the most essential element of how a company can create long term shareholder value, with a superior business model.”
This decision also prevents a long and protracted proxy fight that could have culminated at GM’s annual meeting this summer. But, Barra said GM’s decision to send more profits to shareholders had been in the works for a while.
“This was the framework that we had been working on balancing investing in the business, maintaining a strong investment grade balance sheet, and then doing the right thing and returning capital to shareholders.”
General Motors Chief Financial Officer Chuck Stevens says the company has streamlined its operations to the point where a 20 billion dollar cash stockpile would be enough to keep the business going, even during difficult times. He said it’s even possible that GM could get by with less cash in the future, if it’s able to streamline operations even more.
For GM President Dan Amman, the announcement is one more step in improving General Motors operating performance.
“What you’re see there is really evidence of use being good stewards of our owners capital, only deploying capital in places where we think it can earn a good return.
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