David Einhorn, founder of activist hedge-fund Greenlight Capital, urged General Motors Company (NYSE:GM) to form a dual-class capital structure based on income investing and capital appreciation themes. Greenlight, with nearly half-a-billion invested in GM, recommended stripping dividend from common stock and issuing a new security for every existing share backed by a perpetual dividend payment — $1.52 per share, in-line with current payout, and a tenth of per share voting power.
An investor could choose dividend security for the company’s current yield of 4.35% and a claim on profits before anything goes for the reinvestment in the company, which is what the growth component stock-class owners would remain with to experience gains through share price appreciation.
GM’s price-to-earnings ratio is at the bottom of S&P 500, while its dividend yield—to the tune of 4.4%—is one of the highest, said Greenlight. GM shares currently trade near the 2014-price-range, despite strong earnings growth since. The hedge fund believes GM’s dividends aren’t priced-in at current valuation, given that they are quite sustainable at just a quarter of GM’s earnings.
Greenlight expects the dividend security could trade between $17 and $22, and GM should issue them for each existing common stock, offering more than 50% tax-free return to shareholders — an upside of more than $35 billion.
In response to that, GM CEO Mary Bara said, “for seven months, we’ve extensively reviewed the proposed dual-class structure, as well as other capital allocation strategies, and concluded that continuing to execute our strategy and adhering to our current disciplined capital allocation framework is the best path to deliver increased value”.
The proposal would not help GM sell more cars or make more money, and it poses risks to the company’s credit rating, in effect, limiting financial flexibility due to higher cost of capital, said the company, contrary to Greenlight’s claims that the dual-class structure would reduce the cost of capital. GM’s claims related to losing its investment grade credit rating are in-line with the top credit rating agencies’ responses to Einhorn’s proposal.
GM’s existing strategies to boost shareholder returns include rolling-back all underperforming assets and aggressive share-buybacks ($14 billion authorized since March’15), that can deliver significant EPS, and also dividend growth as the shareholder base becomes smaller.
Whether Greenlight, which owns nearly a 0.9% stake in GM, would be successful in this campaign to change the company’s capital structure depends on what other large-shareholders and majority of retail investors decide with their voting rights in an ongoing proxy fight as GM decided not to recommend any of the Greenlight’s four nominees for a board-election.
Other notable high yielders trading below a PE ratio of 10: Undervalued High Yielders