GM Raises 2016 Profit Forecast, Boosts Buyback by $4 Billion

  • Optimistic outlook also leads to increased quarterly dividend
  • Automaker sees continued but slowing growth in U.S., China

GM Raises Earnings Projection for 2016

General Motors Co. moved to ease concern that slowing global auto-sales growth will cap profit increases, raising its earnings forecast for 2016 by 25 cents a share, adding to its share buyback plan and boosting the dividend.

QuickTake Stock Buybacks

Adjusted earnings per share will be $5.25 to $5.75 this year, GM projected in a statement Wednesday. Anticipating better profit, the company’s board raised the stock repurchase plan to $9 billion from $5 billion and increased the dividend to 38 cents a share from 36 cents. GM advanced 2.8 percent to $31.14 at 10:29 a.m. New York time.

The decision to give more cash back to shareholders indicates that GM thinks it can keep increasing earnings even as management sees slower sales growth in its very profitable North American business and in China.

“GM has the cash to do this,” said Joe Phillippi, principal of consulting firm AutoTrends Consulting in Andover, New Jersey. “They will get sales growth this year but it will be modest.”

GM’s forecast comes a day after Ford Motor Co., the second-largest U.S. automaker, projected record profit in 2016 and announced a special dividend of $1 billion. Ford fell 2.9 percent to $12.48.

‘Investment Opportunity’

“We aren’t a ‘best efforts’ company anymore,” Chief Executive Officer Mary Barra said Wednesday at the company’s Detroit headquarters before discussing the outlook at a Deutsche Bank conference. “We believe GM is a strong investment opportunity.”

Part of GM’s optimism comes from the strong U.S. auto market, which reached a record 17.5 million cars and light trucks sold in 2015. GM expects slight growth from that level. Despite turbulence in China’s financial markets, the company said it still sees the auto sales growing. Breaking even in Europe would be progress because GM hasn’t turned a significant profit there since the 1990s.

GM is relying on strong profit in North America with several key new models coming to market this year, such as the Chevrolet Malibu and Buick Lacrosse family sedans and the GMC Acadia and Cadillac XT5 sport utility vehicles.

Another driver of improved financial performance is more efficient investment in new models, President Dan Ammann said. Almost all of GM’s new models are significantly lighter, which lets the company meet future fuel economy rules with less-expensive engines and transmissions, he said.

GMC’s new Acadia, which goes on sale in May, is 700 pounds (318 kilograms) lighter than the current version and gets better fuel economy, GM said Tuesday at the Detroit auto show.

GM is also building more models using the same frame underneath the car, especially in emerging markets, reducing the cost to develop vehicles, Ammann said. GM announced last year a plan to invest $5 billion to develop new vehicles for markets like Mexico, China and India. One car platform will host those vehicles, replacing several costly sets of hardware, he said.

Margin Target

With GM already developing models more efficiently, the company hit its target of 10 percent margins -- measured by earnings before interest and taxes -- in North America. GM is targeting 9 percent to 10 percent EBIT margin by the beginning of next decade, Barra said.

GM now spends 5 percent to 5.5 percent of revenue on capital expenditures such as developing new vehicles. Over time, GM can reduce that spending and return more cash to shareholders, Ammann said.

In his presentation to analysts at a Deutsche Bank auto industry conference Wednesday, Ammann showed a slide that said GM could reduce its capital spending budget from $9 billion now to just under $8 billion in about 2020.

GM has to be careful not to cut capital spending too much, Phillippi said.

“They are going to have to continue to spend money to differentiate their products from the competition,” he said. “And they have to develop all of these new technologies.”

The company said it has already bought back $3.5 billion of the $5 billion in shares that it announced for repurchase last year.

GM also announced a plan to help its dealers manage an increasing number of off-lease and former fleet vehicles. The automaker will certify them as pre-owned vehicles and offer factory warranties to help dealers sell them at better prices.

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