GM General Motors Company

By David Benoit and Mike Colias 

Investor David Einhorn is pressing General Motors Co. to take the novel step of creating two classes of common stock that would separate its dividend from its operations, a proposal he says would boost the auto maker's languishing stock.

Mr. Einhorn's Greenlight Capital Inc. wants the auto maker to split its common stock into two classes: one that pays dividends and a second that would entitle its holders to all earnings after the dividend is paid.

Greenlight said the move could attract new investors who are willing to pay more for potential earnings growth, boosting the auto maker's market capitalization by as much as $38 billion. GM's market value currently stands at around $52.2 billion, according to data provider FactSet, and it currently pays an annual dividend of $1.52 per share.

In a statement, GM said its board and management team "have thoroughly analyzed and rejected" Einhorn's proposal.

GM said it discussed the plan with Greenlight several times over the past seven months, including a meeting with GM directors. The company said it consulted with credit-rating firms and banks before determining the plan "creates an unacceptable level of risk," including the potential loss of its investment-grade credit rating, which took GM years to restore following bankruptcy.

The company also cited "unknown and uncertain market demand and liquidity" for the proposed shares, which could pressure the stock. And it raised concern about the governance challenges that could arise from having two classes of holders with competing interests.

GM, the nation's largest auto maker, has benefited from a seven-year rise in U.S. auto sales since the financial crisis, while prolonged low gas prices have fueled demand for the company's high-margin pickup trucks and SUVs. It posted $12.5 billion in operating profit last year -- its second straight record -- with the lion's share coming from North America, its primary truck market.

Yet its shares have underperformed the broader market since the company returned to the public markets in 2010 following a government-sponsored trip through bankruptcy court in 2009. The stock closed Monday at $34.71, up about 5% from its $33 initial public offering price in November 2010.

The stock trades at the lowest valuation in the S&P 500, measured by the price compared with its expected earnings-per-share. Its dividend yield, meanwhile, is among the top 25 in the index.

Greenlight has been a GM investor at various points for about five years and had a 0.9% stake and options on 25 million shares at the end of December.

Mr. Einhorn, who also told GM he plans to nominate four directors to its board, thinks the auto maker isn't getting credit for either its earnings potential or its dividend payouts. He believes GM's management is doing a good job operating the business and isn't pushing it to change its capital spending plan, as other investors have done in the past.

The hedge fund estimates the dividend stock could trade at between $17 and $22 and the remaining stock from $26 to $28, according to an investor presentation made public Tuesday. At those levels, the stock gains could total between $12 billion and $38 billion.

GM said the proposal would "have no positive effect on GM's underlying business or cash flows."

"The proposed dividend security would not help GM sell more cars, drive higher profitability, or generate greater cash flow -- nor would it address the fundamental sector factors affecting GM's stock price," the auto maker said.

Mr. Einhorn has made a career pushing what he sees as misunderstood stories on Wall Street. He argued that Lehman Brothers Holdings Inc. was overvalued months before its collapse. He pushed Apple Inc. to issue a dividend-paying preferred stock as a way to return more capital to shareholders, dubbing it "iPref." The company rejected the proposal but later implemented a $100 billion capital return plan.

His campaign comes just two years after GM fended off a proxy fight led by a group of hedge funds and Harry J. Wilson, an Obama administration official who ushered GM through bankruptcy in 2009.

GM responded with a $5 billion stock buyback plan. It also detailed to investors the return it expected on its own spending, tying executive compensation to return on invested capital, a favorite metric of hedge funds and other investors. GM said that above a $20 billion cushion, it would return to shareholders any cash that it couldn't put to work for at least a 20% return.

The moves persuaded the investors, a group that included Appaloosa Management LP and Hayman Capital Management LP, to drop their push to add Mr. Wilson to GM's board.

GM Chief Executive Mary Barra has said she believes the market eventually will reward the company for its improving performance. She has pressed for improved products and cut materials and logistics costs while pursuing technologies that promise to reshape car business, including its acquisition of autonomous-driving startup Cruise Automation and a $500 million investment in ride-hailing company Lyft.

Despite GM's healthy results in recent years, investors are cautious as U.S. vehicle sales show signs of peaking. Analysts say they want to see evidence that GM can remain solidly profitable in the next market downturn.

GM has said it has positioned the business to remain profitable even if U.S. industry sales fall below 11 million light vehicles from the 17.5 million sold last year. Most forecasts show sales remaining in the 16 million to 17 million range for the next several years.

Write to David Benoit at david.benoit@wsj.com and Mike Colias at Mike.Colias@wsj.com

(END) Dow Jones Newswires

March 28, 2017 13:54 ET (17:54 GMT)

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