I grew up in Detroit, and I remember the bad times in the auto industry. The Wall Street Journal reported yesterday, that investors will probably sell the stock if GM reduced their dividend. Why would this information be considered negative, and what is is the Wall Street Journal痴 reason for making this assumption?
In the past, when GM and Ford reduced their dividends, investors looked at this as being a positive, and the stocks went up. I don稚 think that current GM shareholders own the stock because of the dividend. Given the current market environment, owning the stock as an income source would not be very wise.
On the other hand, owning GM shares in anticipation of a dividend reduction would make sense, since the financial hardship that GM is currently experience is the burning of cash.
If GM cuts its dividend in half, the stock would still yield 4.7%, and save the company $550 million a year. When you get a company to stop bleeding cash, this has got to be viewed as a positive, not a negative like the Wall Street Journal would like you to believe.
MUTUAL FUND SELLING WOULD OCCUR?
Some analysts are speculating that a dividend reduction would force many mutual funds to sell. Since the stock is already down 45% from a year ago, one would believe that the majority of the selling was fund related anyway.
In a twist of irony, Brandes Investment Partners, of San Diego, California, announced 鍍hat it purchased for and on behalf of its investment advisory clients 119,740 common shares of General Motors Corp on January 6, 2006, which represents approximately 0.0212% of the issued and outstanding common shares of GM. As of January 6, 2006, Brandes exercised control over 56,646,101 common shares, which represents approximately 10.0169% of the issued and outstanding common shares of GM�.
In the recession of 1973-74 (Oil Crisis- Again), GM didn稚 reduce their dividend until November of 74. In December, the stock bottomed at $28.87, and climbed to $38.50 by the end of January 1975. In short, I think the concerns over a dividend cut are overblown.
While I have not recommended GM for the IA portfolio, it does remain an interesting bet for speculators.
KERKORIAN担 BOY, YORK, CALLS FOR CHANGE
Prosperity; Says Tracinda Would Support Dividend Cut in Speech to Society of Automotive Analysts
DETROIT--(BUSINESS WIRE)--Jan. 10, 2006 Jerome B. York, advisor to Tracinda Corporation, today called on all General Motors Corp. (NYSE: GM) constituencies to participate in an "equality of sacrifice" program to enable GM to return to prosperity. Speaking to the Society of Automotive Analysts, York said it would lead to a stronger partnership between GM and the United Auto Workers (UAW), a relationship that is key to a healthy future for the company. York said Tracinda, which owns 7.8% of GM's shares, would support a significant reduction in GM's dividend as part of a comprehensive "equality of sacrifice" plan.
York said, "The reality is that all constituencies -- the companies themselves, their investors, their unions and employees, and indeed the communities in which they live and work -- are in this together and should therefore work together towards the best collective solution. The UAW will be a key partner in much of what GM must do, and we believe an 'equality of sacrifice' approach similar to what was done at Chrysler in 1980, and consistent with what Mr. Gettelfinger recently wrote in the Detroit News, will be necessary."
York also said that Mr. Kerkorian is interested, at the appropriate time, in reacquiring the 12 million GM shares that he sold for tax purposes in December 2005. Mr. Kerkorian is also willing -- under the right circumstances -- to acquire an additional 12 million shares, which would require certain regulatory approvals.
Commenting on a potential share purchase, York said, "The considerations regarding such additional purchases would be mainly that GM continues to take aggressive and effective actions to improve the performance of the company, and that GM and the UAW work together to build a stronger partnership leading to constructive solutions to the enormous industry-wide problems facing not only GM, but the other domestic companies as well."
He concluded, "Given the domestic industry's current situation -- higher costs than its foreign competitors, and market share losses to those competitors -- it is crucial that the industry pick the right fork in the road as it moves forward.... that assumes not only are better products and capacity realignment required, but all of the old ways of doing business have to be scrutinized, recognizing that some aspects of the business that were affordable a decade ago are no longer possible."
A copy of York's speech will be filed today as part of Tracinda's 13-D filing with the Securities and Exchange Commission and will be available at its website www.sec.gov.
