General Motors Stock: $10B Share Repurchase Program In Focus (NYSE:GM)

Contextualizing the $10 accelerated share repurchase program

General Motors (NYSE:GM) just provided a financial update. A key component of the update involves a $10B accelerated share repurchase program. Other updates are relatively minor or routine in my view, such as a small revision of its 2023 EPS guidance range and some cost-cutting initiatives.

To properly contextualize the magnitude of the share repurchase program, the chart below shows its historical share repurchase activities. As seen in the top panel, GM’s share repurchases have been largely negligible between 2019 and 2022. It only became a significant part of its capital allocation in the recent ~1, peaking at about $1.5B on a quarterly basis in 2022 and then declining to the current level of $250 million. In terms of buyback yield (see the bottom panel), this level of buyback translates into a net common buyback yield between about 4.9% to 7.5% when annualized already. As such, the new $10B program easily dwarfs all its repurchase activities in the recent past.

Against this background, in the remainder of the article, I will argue why this new program is overdone and not the best idea to allocate GM’s capital. My key considerations are twofold. First, the company already is spending more than it should on share repurchases without the new accelerated program. Second, the company already is facing a number of headwinds, and the repurchase program could further reduce the company’s capex investment and make it more difficult for it to stay competitive. I will elaborate on both points in the next section.

Why the $10B repurchase program is overdone

To further contextualize GM’s new repurchase program, the next chart compares GM’s historical repurchase activities to those from Ford (F). As seen, the company already is spending much than more Ford in the past both in terms of absolute dollar amount and in terms of buyback yield. To wit, GM repurchases in the past 1~2 years represent a buyback yield between ~4.9% to 7.5% as aforementioned, far exceeding that from Ford (about 1.14%).

More concerning, the company already is facing a number of headwinds, such as the rising prices of raw materials, rising debt (especially in combination with rising borrowing rates), the cost increases due to the new deal with the United Auto Workers, and the increasing competition from electric vehicle startups. The repurchase program could further reduce the company’s cash flow and reduce the capital available for investing in the new technologies that it needs to stay competitive. Take its debt as an example. As seen from the chart below (top panel), its debt levels are quite high and have kept climbing in recent years. As of 2019, GM’s total long-term debt stood at about $104 billion. The debt has been consistently increasing and has reached $114 as of the most recent quarter. In the meantime, its earnings have not kept pace with the debt increase and higher borrowing rates made the picture even more dire. As an end result, its financial debt to EBITDA ratio is quite elevated in my view both in absolute and relative terms. As seen in the bottom panel, its financial debt to EBITDA ratio currently hovers around 4.7x, both above its historical average and close to the peak level in recent years. I think reducing debt should take higher priority in its capital allocation decision.

Especially considering that the company will need a considerable amount of capex expenditure to stay competitive, particularly on the EV front. In my view, GM already is late to the EV party and has been playing catch-up. As you can see from the following chart, GM only produced 7,820 EVs in the first half of 2022, far behind its main competitors both domestically and abroad. The company only expanded its EV delivery to 36,322 in the first half of 2023, an impressive ramp-up indeed. But its current EV capacity still has no clear advantage compared to several of its competitors as seen and its competitors are not sitting still. Ford, for example, already has a plan to ramp up its F-150 Lightning and Mach E capacity by 2x and 3x, respectively.

And if you combine the information in this chart with those from the next, you will see that its recent ramp-up is largely the result of heavy capex during 2021. Its capex expenditure peaked at around $28B in 2021. But it has declined significantly since then, both in terms of absolute dollar amount and also as a fraction of its total revenue (see the bottom panel of the second chart below).

Upside risks and final thoughts

My arguments above are concentrated on GM’s downward risks. To provide a more balanced view, there are a few key upside risks afoot too. First, GM still sells some of the most popular models in the auto market such as its pickups and SUVs. Second, GM’s valuation is currently very compressed. At an FY1 P/E of ~4.2x, it’s very cheap both in absolute terms, in comparison with its peers like Ford (trading at 5.6x FY1 P/E), and especially in comparison with the overall market (trading at ~25x P/E). Finally, the United Auto Workers strike ended with both parties reaching an agreement. The agreement will have an impact on GM’s cost and profitability for years to come (see my earlier article for details). But in the near term, the strike (which lasted for six weeks) has finally ended, and the company can resume operation on those sites.

All told, my overall conclusion is that the stock is in a better position compared to 2~3 months ago when the duration and final outcome of the strike was totally uncertain. However, I’m not sure about the company’s capital allocation priorities, and not optimistic about its future competitive position. These conflicting thoughts are the reason for my HOLD rating.