DETROIT General Motors Co (GM.N) investors are focused on the possibility of stock buybacks or a dividend on common shares now that the U.S. government has outlined its plans to sell the rest of its stake in the No. 1 U.S. automaker by year end, analysts said.
Analysts expect GM next year to buy the rest of its Series A preferred stock owned by the United Auto Workers healthcare trust and the Canadian government, and then return cash to shareholders through a buyback and dividend that will draw more interest from potential investors.
"The likely clean-up of the Treasury stake by year end moves capital allocation to the forefront for 2014," Barclays' analyst Brian Johnson said in a research note.
The U.S. Treasury said it would exit its stake in GM by year end, a move many on Wall Street had expected despite prior announcements that it would sell the rest of its shares by April 2014.
Analysts said Treasury's exit will remove the stigma of the nickname "Government Motors" that executives said has hurt GM sales slightly. It also will eliminate the compensation cap put in place after the $49.5 billion U.S. bailout in 2009, allowing GM to pay market rates to retain and attract top talent.
With about $37 billion in total automotive liquidity, GM has cash to go in several different directions, although executives have repeatedly stressed that it will focus on investing first in its operations.
"The priorities for cash reinvestment haven't changed," GM Chief Financial Officer Dan Ammann told analysts on the company's earnings conference call late last month. "We're obviously focused on reinvesting in the business, making sure we have a winning product portfolio going forward."
He said buying back the rest of GM's preferred shares next year remains in the plans and longer term, the Detroit company's priority is returning cash to shareholders.
GM bought back 120 million preferred shares in September held by the UAW Retiree Medical Benefits Trust for about $3.2 billion, leaving 140 million shares with the trust and another 16 million with the Canadian government, worth a combined $3.9 billion. Those shares are redeemable on or after December 31, 2014.
Those shares pay a 9 percent dividend. GM bought back the UAW Trust preferred shares as a way to cut its costs by financing the deal with lower-cost debt.
Barclay's Johnson expects GM to buy back the Canadian government's stake in GM next year, which would cause him to boost his earnings estimate by 3 percent to 4 percent, and expect a dividend announcement in the first half of the year.
Officials with the Canadian government and the province of Ontario have said they will not hold a fire sale and will look to maximize the return for taxpayers.
The Canadian and Ontario governments, which in September sold 30 million GM shares, became shareholders in 2009 when they contributed more than C$10 billion ($9.66 billion) to a bailout to keep GM afloat.
Canada GEN Investment Corp, the holding vehicle for the GM shares owned by the two governments, after the September sale still held more than 110 million GM common shares as well as the preferred shares.
Johnson also said GM could institute a stock buyback program for $1.5 billion next year and in 2015, and $3 billion to $4 billion a year beyond that as the automaker ramps up its annual cash generation.
For some, paying a dividend on common shares cannot come soon enough. GM last paid such a dividend in May 2008.
"For me to buy in the equity income fund, I'd like to see them reinstate that dividend," said Gary Bradshaw, portfolio manager with Hodges Capital management in Dallas. He owns shares in rival Ford Motor Co (F.N), but not GM.
Bradshaw likes GM's earnings potential and said the stock could increase next year to $45 a share. GM's stock was trading at $37.70 on Monday on the New York Stock Exchange.
Gabelli & Co analyst Brian Sponheimer said a dividend payment is a likely outcome, but he would prefer stock buybacks given the cyclicality of the automotive industry. After the elimination of the preferred shares, however, GM becomes more of an execution story as it works to end losses in Europe and roll out its highly profitable full-size trucks and SUVs.
"There's a lot to like with the potential of a multiyear expansion in pickup truck sales and the full rollout of the K2XX platform," he said, referring to the new full-size pickup trucks and SUVs.
That would leave who will be Chief Executive Dan Akerson's successor as the primary question for the company to answer, Sponheimer said.
(This version of the story removes an extraneous quote mark in last paragraph)
(Reporting by Ben Klayman in Detroit; additional reporting by Cameron French in Toronto and Lousie Egan in Ottawa; Editing by Leslie Gevirtz)