Overview
General Motors (GM), in the aftermath of an extended U.S. strike, revealed a substantial financial hit of $9.3 billion due to new labor agreements. Despite this setback, GM showcases resilience by announcing a robust strategic move—a $10 billion stock buyback. This initiative is accompanied by a notable 33% dividend increase and a commitment to reduce spending at its autonomous vehicle unit, Cruise.
Impact on Stock and Market Sentiment:
Despite a challenging year with the U.S. strike, issues at Cruise, and hurdles in launching electric vehicles, GM demonstrates confidence with the buyback plan. At Tuesday’s closing price, the $10 billion buyback represents nearly 25% of GM’s common stock. Pre-market trading on Wednesday witnessed a positive uptick, with shares rising by approximately 9%.
Labor Deals and Financial Implications:
The $9.3 billion additional costs, spanning until 2028, stem from agreements with the United Auto Workers (UAW) and Canadian union Unifor. Translating to approximately $575 per vehicle over the deal’s lifespan, these costs have led GM to revise its 2023 profit expectations downward.
Revised 2023 Profit Outlook:
In light of the UAW strike, GM revises its net income projections for 2023 to a range of $9.1 billion to $9.7 billion. The estimated $1.1 billion EBIT-adjusted impact from the strike contributes to this adjustment, encompassing lost production and increased wages and benefits.
Strategic Measures:
GM, under the leadership of CEO Mary Barra, emphasizes a commitment to shareholders amidst challenges. The company had earlier announced plans to reduce fixed costs by $2 billion by the end of 2024, complemented by an additional $1 billion in cost reductions in July.
Cruise Unit and Cost-Cutting Measures:
Cruise, GM’s autonomous vehicle division, faces a recalibration in response to recent challenges. With testing suspended in the U.S. following a California crash, the unit incurred over $700 million in losses in the third quarter alone. Job cuts and substantial reductions in spending are anticipated, with 2024 expected to witness a more measured expansion.
Rebuilding Trust and Regulatory Challenges:
Acknowledging the need to “rebuild trust” with regulators, Barra addresses federal safety investigations and Cruise’s struggle to gain approval for its next-generation self-driving car. The unit has faced setbacks, including a lack of regulatory approval to operate its humanless control vehicle on public roads.
Electric Vehicle Production and Future Projections:
While expressing disappointment in this year’s electric vehicle (EV) production, particularly in battery module assembly, Barra projects a positive shift in 2024. Anticipating significantly higher production and improved profit margins, GM aims to overcome the challenges faced in EV production.
Financial Strategies:
GM, dealing with increased costs under the new UAW contract, asserts its commitment to offsetting incremental expenses. The accelerated share repurchase program, involving $10 billion allocated to executing banks, is set to retire $6.8 billion worth of GM common stock immediately.
Share Repurchase Details:
Executed by major banks such as Bank of America, Goldman Sachs, Barclays, and Citibank, the share repurchase program is expected to conclude in late 2024. GM retains an additional $1.4 billion in capacity for future stock buybacks.
Dividend Increase:
In addition to the stock buyback, GM plans to enhance shareholder value by increasing its common stock dividend by 3 cents per quarter, reaching 12 cents a share starting in 2024.
Conclusion
Despite the financial challenges posed by labor deals and operational setbacks, GM’s strategic moves signal resilience and confidence in its ability to navigate uncertainties. The combination of stock buybacks, dividend increases, and cost-cutting measures positions GM for a robust rebound in the coming years.
