GM General Motors Company

Auto maker rejects investor proposal for dividend-paying shares and a growth class

By David Benoit and Mike Colias 

Investor David Einhorn is pressing General Motors Co. to create two classes of common stock that would separate its dividend from its operations, a novel proposal designed to invigorate a stock that has languished despite rising sales and profits.

Mr. Einhorn, founder of hedge fund Greenlight Capital Inc., on Tuesday publicly called on 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 additional earnings.

His theory is that the two classes of stock would attract new yield-hungry investors and those looking for growth. The increased demand for the stocks, Mr. Einhorn said, could boost the auto maker's $52 billion market capitalization by as much as $38 billion.

GM rejected the proposal, saying it "creates an unacceptable level of risk," including the potential loss of its investment-grade credit rating. It also cited "unknown and uncertain market demand" for the proposed shares and raised concerns about governance challenges that could arise from having two groups of shareholders with competing interests.

GM shares rose 2.5% to $35.56 Tuesday, a sign that investors are hopeful the campaign will produce gains in the stock.

Mr. Einhorn, a competitive poker player famous for his bearish bet on Lehman Brothers Holdings Inc., has signaled he is willing to fight, telling the company he may seek four seats on its board. Greenlight has a 4.9% stake in GM, including options, according to a Tuesday regulatory filing.

The campaign is another dilemma for a company that has grown used to them. GM staved off a board fight with a group of hedge funds two years ago with a $5 billion share buyback and emerged from a government-sponsored trip through bankruptcy court in 2009. Chief Executive Mary Barra has publicly wrestled with GM's stock price, which has underperformed the S&P 500 since its 2010 return to the public markets.

The move has reignited a debate over whether a company's capital structure influences its market value. Mr. Einhorn has privately pushed similar dual-class structures at other companies in recent years but hasn't yet found a taker, people familiar with the matter said.

"If it makes the equities more attractive to investors, because now they can have more choice, great," said James Angel, a finance professor at Georgetown University. "Is it a panacea for low valuation? I doubt it."

Ms. Barra and GM's board met with Greenlight several times over the past seven months to discuss the idea. Two banks told the company the plan wouldn't work, according to people familiar with the matter. GM secretly consulted with a third bank, saying the proposal was its idea, the people said. The outcome was the same.

S&P Global Ratings and Moody's Investors Service on Tuesday said the proposal, if implemented, could negatively affect GM's credit rating.

"GM should not be guinea pig for this experiment," said a person close to the auto maker who examined the proposal.

GM has benefited from a seven-year rise in U.S. auto sales since the financial crisis, while low gasoline prices have fueled demand for the company's high-margin pickup trucks and sports-utility vehicles. It posted $12.5 billion in operating profit for last year, its second straight record.

Yet, through Monday's close, the stock had risen just 5% from its $33 initial public offering price in November 2010, a period during with the S&P 500 more than doubled.

GM's price-to-earnings ratio, based on analyst forecasts for the next year, ended Monday at 5.6, the cheapest among all stocks in the S&P 500 and well below Ford Motor Co.'s 7.1. To catch up to its rival on that front, GM's shares would need to rise about 25%.

Its dividend yield, meanwhile, is among the top 25 in the index. The company pays an annual dividend of $1.52 a share.

Mr. Einhorn said he thinks the auto maker isn't getting credit for its earnings potential or robust dividend. He said he believes GM's management is doing a good job and isn't pushing it to change its capital-spending plan, as other investors have done in the past.

He 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.

Mr. Einhorn has made a career pushing what he sees as misunderstood stories on Wall Street. He argued that Lehman 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.

An investor whose firm owns more than 800,000 GM shares said the proposal "is not value-enhancing" and is happy with the actions GM is taking to increase its value.

"You've got a stock that's a great value play at five times earnings and a 5% yield," he said. "Why do this to distract a good management team that has taken us back from the abyss?"

Ms. Barra has said she believes the market eventually will reward the company for its improving performance. She has pressed for improved products and cut costs while pursuing technologies meant to reshape the car business, including its acquisition of autonomous-driving startup Cruise Automation and an investment in ride-hailing company Lyft Inc..

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 29, 2017 02:47 ET (06:47 GMT)

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