The Reason Behind GM’s New $5B Buyback Plan

GM Announces Buyback Plan

General Motors will buy back $5 billion worth of its own stock by the end of 2016. The automaker announced the shareholder buyback program Monday, a plan that is basically intended to fend off a battle with a group of shareholders, and specifically one of them.

Harry Wilson, a former hedge fund manager who helped GM restructure during its bankruptcy, announced last month that he intended to land a seat of GM’s board of directors and then launch an $8 billion stock repurchase program by the end of the year. But GM’s newly announced buyback plan immediately put a squash to that idea and Wilson says he’ll no longer seek a board seat.

GM CEO Mary Barra said: “GM is moving ahead with its comprehensive capital allocation framework, and constructive dialogue with our shareholders has helped ensure that we are addressing these key initiatives with the appropriate level of clarity and transparency. We will continue to be engaged with all of our shareholders and to be responsible stewards of our owners’ capital.”

Wilson said: “Today’s announcement by General Motors represents the culmination of a constructive dialogue between our investor group, senior management and the Board. As a result of this dialogue, we have arrived at a win-win outcome that includes a thoughtful approach to critical capital allocation issues and other important measures to increase long-term shareholder value. We thank Mary Barra, senior management and the Board for their engagement and focus on these important issues and for working toward a mutually successful outcome.”

In Monday’s statement, GM also outlined plans to build it cash balance to $20 billion while returning “all available free cash flow to shareholders.” This year, GM will invest $9 billion into its future growth, which will cover a more aggressive launch cadence in the coming years.

“As we continue to execute on our plan to become the most valued automotive company, our track record of improved operating performance, strong earnings momentum, and disciplined capital investments provide the foundation for a comprehensive capital allocation framework,” said Barra. “We will continue to invest in innovative technologies and world-class vehicles that will deliver sustained profitable growth and maximize returns to shareholders.”

GM outlined its capital allocation framework in a press release:

  • High-Return Investment in the Business – GM previously stated it expects capital expenditures in 2015 of $9 billion to invest in future growth, including a more aggressive vehicle launch cadence in the coming years. GM will reinvest in its business with the objective of driving 20 percent or higher return on invested capital (ROIC) through investments in world-class vehicles and leading technology. The company plans to disclose its ROIC performance each quarter beginning with its first quarter 2015 report.  The company expects this disciplined capital deployment will strengthen and grow GM’s brands and drive improved financial performance and will result in capital spending in the range of 5–5.5 percent of its annual revenue in the future.
  • Maintain an Investment-Grade Balance Sheet – GM intends to maintain an investment-grade balance sheet, including a target cash balance of $20 billion. GM believes maintaining an investment-grade balance sheet is critical to support long-term growth and increased earnings at GM Financial, which is a catalyst for improved automotive sales and profitability.
  • Return Capital to Shareholders – Beyond reinvesting in the business and maintaining an investment grade balance sheet, the company expects to return all available free cash flow to shareholders. Starting in January 2016, GM will develop its annual capital return plans and communicate them to the market during the first quarter of each year.
Photo Credit: General Motors
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