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GM gets it wrong with discounts, dividend
It's time for GM to make better cars, not just cheaper ones. And to stop coddling investors with an overly generous payout.
By Robert Walberg
New year, same story. While most of us have resolved to improve ourselves by exercising more, spending more time with family, reading the classics, etc., General Motors CEO Rick Wagoner and the rest of GM's management team appear committed to driving the automaker right into the ground.
Whether its the recent plan to slash prices on more of its models or the steadfast refusal to cut the dividend, management continues to make one dumb decision after another.
Discounting discounts
Lets start by talking about the General Motors' (GM, news, msgs) recent announcement that it will trim prices on a number of models, thereby cutting prices on more than 80% of its models over the last year. The company says that because of its recent improvements in operating efficiencies it can afford to cut prices without risking additional losses. Are you kidding me?
First of all, GM customers have been conditioned to wait for incentives and discounts before pulling the trigger on a purchase. GMs most recent program was to give all buyers the same discount as GM employees. Note that these discounts were available even on the models that had already seen their prices cut. The company layered discounts upon discounts. The result -- a loss of about $3.8 billion through the first three quarters of last year. Fourth quarter numbers, due out Jan. 26, are likely to be ugly, as well.
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The second problem with this strategy is that it continues to emphasize price over substance. Management is basically conceding that the only reason for a consumer to buy a GM car is because it's cheap. In an era when its tough to buy a new car for less than $20,000, cheaper isnt necessarily bad. But GMs problem isnt the cost of its cars, but the quality. Makes like Honda and Toyota continue to have better resale values. And despite its cheaper cars, GM continues to lose market share.
Time to kick the dividend crutch
After focusing excessively on cutting costs, management is now focusing on cutting prices. What management seems incapable of doing is focusing on producing better quality, better looking cars and trucks that resonate with consumers. Losses will continue to accrue at an alarming rate until Wagoner & Co. get the picture. As I suggested in earlier articles, Im afraid they never will.
Managements refusal to consider slashing its 9% dividend yield is just further proof that its time for new leadership. The only conceivable argument for refusing to slash the dividend rate is that in so doing, the stock price might fall. News flash: Investors are selling, regardless of the dividend. GMs share price is down 44% over the last 12 months.
Regardless of Kirk Kerkorians motives, its impossible not to see the common sense behind his call for a 50% reduction in GMs dividend. Heck, 50% might not be aggressive enough, as it would leave the payout rate at about 4.5% -- still high by most standards. But whether the company should cut the dividend rate by 50% or 70% isnt the question, the question is why management hasn't taken this step already.
GM burned through more than $4 billion in cash last year and it is likely to do the same again this year. Though the company is sitting on a mountain of cash, $4 billion is still a pretty considerable burn rate. Why not save roughly $500 million this year by cutting the dividend in half.
Now is the right time to do it. (Actually the right time would have been at least six-months ago, but lets not be picky.) Contrary to managements belief, investors would be more likely to applaud the move than to condemn it. Yes, some investors holding the stock only for its unsustainably high dividend yield might sell. But Im willing to bet that at least an equal number would see the move as a sign that management is serious about improving the companys long-term financial position.
Cutting the dividend is a no-brainer. But with GM, that doesn't make it any more likely to happen.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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