Barra did reaffirmed GM’s full year forecast unchanged

General Motors on Monday (9 March) announced a comprehensive capital allocation framework, saying improving business performance and strong capital discipline had enabled increased returns to shareholders.

Consequently, GM and an investment group led by Harry Wilson jointly announced that Wilson had agreed to withdraw his nomination to stand for election to the board of directors at the company’s 2015 annual meeting and to withdraw his shareholder proposal.

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The automaker said a “foundational element” of its approach would be to return all available free cash flow to shareholders while it maintains an investment grade balance sheet underpinned by a target cash balance of US$20bn.

GM also announced its board had authorised an initial repurchase of $5bn in GM shares to begin immediately and conclude before the end of 2016.

The automaker last month said it would increase its quarterly stock dividend to $0.36 per share effective in the second quarter of 2015 as part of the board’s regularly scheduled second quarter 2015 dividend declaration process which would result in an expected dividend payout of approximately $5bn to the end of 2016.

“As we continue to execute on our plan to become the most valued automotive company, our track record of improved operating performance, strong earnings momentum, and disciplined capital investments provide the foundation for a comprehensive capital allocation framework,” said GM CEO Mary Barra.

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“We will continue to invest in innovative technologies and world class vehicles that will deliver sustained profitable growth and maximise returns to shareholders.”

GM’s capital allocation framework encompasses three core principles:

  • High-return investment in the business – GM previously stated it expects capital expenditures in 2015 of $9bn to invest in future growth, including a more aggressive vehicle launch programme in the coming years. GM will reinvest in its business with the objective of driving 20% or higher return on invested capital (ROIC) through investments in world class vehicles and leading technology. The company plans to disclose its ROIC performance each quarter beginning with its first quarter 2015 report. The company expects this disciplined capital deployment will strengthen and grow its brands and drive improved financial performance and will result in capital spending in the range of 55.5% of its annual revenue in the future.
  • Maintain an investment grade balance sheet – GM intends to maintain an investment grade balance sheet, including a target cash balance of $20bn. The automaker believes maintaining an investment grade balance sheet is critical to support long term growth and increased earnings at GM Financial which is a catalyst for improved automotive sales and profitability.
  • Return capital to shareholders – Beyond reinvesting in the business and maintaining an investment grade balance sheet, the company expects to return all available free cash flow to shareholders. Starting in January 2016, GM will develop its annual capital return plans and communicate them to the market during the first quarter of each year.

In 2014, the company established an executive pay programme that aligns management incentives with ROIC and total shareholder return. GM said it was committed to providing greater clarity around its ‘compensation’ programme and would continue to evaluate it to ensure that strong linkage. 

GM reaffirmed that in 2015 it expected its total earnings before interest and tax (EBIT) adjusted and EBIT-adjusted margin to increase, compared to 2014, after adjusting 2014 for the impact of recall costs. The company reiterated that it was on track to meet its 2016 financial targets to achieve EBIT-adjusted margins in North America of 10%; to return to profitability in Europe; and to maintain strong margins in China. It also reaffirmed its long-term strategic plan to achieve 910% EBIT-adjusted margins by early next decade.

Investment advice website seekingalpha.com said the GM move to return billions of dollars to shareholders was done with the hope of avoiding a potential proxy fight with Wilson.

Wilson has been critical of GM’s cash management and share price.

Last week, the website noted, famed Omaha-based investor Warren Buffett took aim at Wilson.

“I totally disagree with the idea of putting somebody on the board who has an option on some other people’s stock which is only good for two years,” Buffett reportedly told CNBC.

Buffett also added praise for CEO Mary Barra, saying she was doing a good job leading the automaker, seekingalpha said.