The internet was ablaze Tuesday evening with stories presenting a perceived positive move by General Motors’ outgoing government-appointed management. All hail! “General Motors to pay first dividend since 2008,” trumpeted the headlines. GM shares immediately spiked up in after-hours trading with shares rising about $1.60 or 4% on the news. Unfortunately for those duped by the proclamation, GM followed the story hours later with a profit warning. For the time being, the bad news outweighed the good with GM shares reversing course and ending the day Wednesday with a loss of over one and a half percent on a day that the market rallied.
So, let’s ask the questions mainstream journalists won’t. Why in the world would GM announce a dividend (subsequently hurting investors who buy on the news) hours before giving negative guidance? Why was this decision and announcement made by outgoing management just days before new CEO, Mary Barra (who made the negative guidance announcement) takes over at the helm? Most importantly, why would GM want to burn more cash by offering a dividend if margins and profits are not going to grow as expected?
First, it’s important to recognize who is still running GM and how they have operated in the past. There are still board members who were appointed by President Obama, as was outgoing CEO, Dan Akerson. The company has had a suspected history of fudging earnings by stuffing inventory channels and using smoke and mirrors accounting practices. Deceptive tactics also included misrepresenting the potential for the Chevy Volt and then dishonestly explaining away poor sales by blaming supply constraints.
It can only be assumed that the timing of the dividend announcement was designed to prop up share price before negative news hit. The government-appointed management at GM did what the government does best; spend money supplied by the taxpayers.
The cash on GM’s balance sheet came from taxpayers who supplied about 50 billion dollars worth. That number is dwindling as GM continues to freely spend money, even as taxpayers had to register a $10.5 billion loss on their forced investment in GM.
The priority at GM should be to conserve cash and operate as efficiently as possible so that any future downturn in auto sales can be weathered, just as Ford did prior to the 2009 meltdown. It is widely known that Ford did not need taxpayer handouts because they kept a reserve of cash thanks to an additional $20 billion which they borrowed shortly prior to the economic downturn.
Instead, GM brags about spending billions of dollars to create jobs. Advertising spending is through the roof, ensuring GM of favorable news coverage by TV media outlets who will not dare to risk insulting a sponsor that spends billions of dollars on marketing a year. Now comes the nefariously timed dividend announcement.
GM’s balance sheet is not quite the “fortress” that they like to portray. Debt is once again burgeoning as the company grows its captive finance unit, a necessary step in the auto world. European operations are still a burden with a recent report estimating a negative value of $11.5 billion. GM still has huge UAW pension obligations. Top all of that off with the highly cyclical and highly competitive nature of the auto industry. Large cash reserves need to be kept on hand to weather cyclical downturns. Is there any logical reason for GM to burn more cash on a dividend after taxpayers had to learn a hard lesson the first time around?
There is one very important reason that GM wants to manipulate share price higher any way it can. The UAW still holds billions of dollars worth of shares in its trust (VEBA) which pays for healthcare benefits of its retirees. If GM underperforms and share price drops, there will be a double whammy for GM. Perhaps the timing of the dividend announcement was designed to help prop up share price as it coincided with a potential sell-off of the UAW’s holdings.
The VEBA agreement, which came about before GM’s bankruptcy, made the UAW liable for future healthcare costs for retirees. This came at a cost of about $30 billion to GM to fund the account. During the Obama-manipulated bankruptcy process, this creditor claim was given precedence over non-union claims which should have had the same legal standing. That is how the trust became funded with cash, preferred stock and common stock of “New” GM.
Up until last years bull run, the VEBA trust had been bleeding cash and was largely underfunded. The more recent positive cash flow for the VEBA account may be short-lived if GM shares take a significant hit. I expect the huge healthcare obligations to reenter future contract talks between GM and the UAW as healthcare costs eventually climb faster than investment revenue in the VEBA. US taxpayers should also keep a keen eye out for covert bailouts for the UAW, such as the “ERRP” pork that was included in the Obamacare bill.
Future UAW demands and costs to GM are inevitable. President Obama made sure of that by having his Auto Task Force protect union claims in the GM bankruptcy process. All GM can do to survive the unavoidable added labor cost is to build the best cars as efficiently as possible. Political maneuvering, such as issuing a dividend just prior to an earnings warning or focusing on politically popular but money-losing “green” vehicles, will only worsen the situation. Mary Barra will have to pull in the reins and start operating GM as a corporate entity instead of a political one if she wants to avoid history repeating itself. After all, $50 billion of taxpayer money just doesn’t go as far as it used to.
Mark Modica is an NLPC Associate Fellow.