This column was originally published on RealMoney on Feb. 6 at 8:06 a.m. EST. It's being republished as a bonus for TheStreet.com readers.
There should be active trading in
The company is holding its annual board meeting and I suspect there will be some meaningful developments for equity holders to digest, none more important than the fate of General Motors' cash cow, GMAC.
Despite GMAC's importance to General Motors' bottom line -- the division earned $614 million in the fourth quarter vs. a loss of $1.46 billion for the company's North American auto business -- the auto giant is under pressure to do something to improve liquidity. Selling a controlling stake in its most prized asset, GMAC, may be the solution.
General Motors has been contemplating using GMAC as a source of funds for a few months now. In fact, discussions began in late August and have continued for so long that some analysts have questioned if a deal is even possible on terms favorable to General Motors. Even so, recent speculation in the media that a deal is near is likely a good indicator that negotiations between GMAC and interested parties are ongoing and the board could reach a decision this week.
GMAC has been a junk-rated financing firm since its debt was downgraded last November, so it's seen its margins compress because of higher borrowing costs. Given the sheer size of its loan portfolio, every basis point is critical to results and carrying a junk rating due to its parent's liquidity problems could deal a big blow to profits going forward.
However, a deal to sell a 51% stake in GMAC to an investment grade firm may be a step in the right direction. Not only would a deal bring in a boatload of cash -- most analysts are looking for between $10 billion to $15 billion -- it would also help lower GMAC's cost of funds. For instance, partnering up with an investment-grade rated firm like
-- two names that have been mentioned -- would help improve GMAC's profitability because GMAC's loans will be assigned the credit rating of its partner.
GM faces significant pressure from shareholders, bondholders and worker unions to fix its balance sheet, so the announcement of a deal for GMAC in the coming week is a strong likelihood, in my view.
Diving Into the Dividend
Speaking of cash, another point of discussion in the meeting may be GM's dividend, a topic I delved into
in this article.
General Motors had a net loss in 2005 of $8.5 billion and burned through some $5.9 billion in cash from operations, including an $800 million gain from an asset sale that was very one-time in nature. Even so, the company continues to pay out $1.16 billion a year in dividends to equity holders.
Although its total dividend payments are just a small part of General Motors' cash outflows and cutting the dividend in its entirety wouldn't be a make-or-break move, it may be a necessary step if General Motors wants some negotiating leverage with employees and retirees. If it steadfastly wastes cash on its dividend, the company can't easily ask employees to take pay cuts, retirees to take benefit cuts, consumers to pay more for cars, and ask the government for a handout.
I don't believe General Motors can reasonably justify its current payout and expect the unions and government to take a favorable view of the company's efforts to shore up its financials on its own. For starters, General Motors' stock is yielding 8.5%. While the yield is healthy relative to the
average yield of 1.7%, it is also a numerical representation of scared shareholders requiring a higher fixed rate of return, to compensate for the risk of owning a company with a serious potential for Chapter 11 bankruptcy filing.
General Motors denies Chapter 11 is even on the table at present.
Also, General Motors is no longer profitable. According to online investing dictionary Investopedia, a dividend is a distribution of a portion of a company's earnings. With profitability not in sight in the near-term, the company is essentially borrowing money to pay equity holders. But with nearly three times as much non-GMAC debt as equity, General Motors may come under pressure from debt holders to stop the dividend -- and they are more senior in the capital structure than common stock holders.
I continue to believe General Motors liquidity will be a bigger problem in the coming years than most investors believe. Its pension and health care liabilities are nearly impossibly to accurately tabulate due to the confusing manner in which accounting rules govern U.S. pensions. The company is rapidly burning cash, and admitted on its fourth-quarter earnings conference call that its access to the capital markets is nonexistent.
Even so, the stock could get a lift this week if the company offers a glimmer of hope to shareholders in the form of a GMAC deal and a dividend cut.
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William Gabrielski is a research analyst at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback;
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