DETROIT – Investors in General Motors Corp. (GM) will be keeping an eye out for news from its board meeting next week, when the world's largest automaker is expected to affirm its high dividend despite many recent travails.
GM (search) declined to comment Friday on the date of the board meeting or the agenda, but a source close to the company said the meeting was scheduled for Monday.
Billionaire investor Kirk Kerkorian's (search) plans to double his stake in GM diminishes the likelihood that it would cut the payout, and raises the chance that he could press for a special bonus payment in the future, analysts said.
"To have a $2 (annual) dividend is a very shareholder friendly position for the company to have, and (Kerkorian) respects that," Kerkorian lawyer and spokesman Terry Christensen told Reuters this week.
GM's $1.1 billion loss during the first quarter, its worst result since the automaker brushed close to bankruptcy in 1992, and its weak credit ratings had spurred some analysts to believe that the dividend could be cut in the next two years.
But Kerkorian's move changes that, analysts said. The casino mogul stunned Wall Street when his company Tracinda said Wednesday it intended to increase its stake in GM to up to 8.8 percent by spending up to $868 million for the shares.
Kerkorian will be a passive investor, Christensen said.
But given his history of shaking corporate boardrooms, including his attempted takeover of Chrysler Corp. a decade ago, financial analysts expect he may press for GM to distribute to investors some of the automaker's $38.3 billion in holdings of cash and short-term securities.
"Kerkorian may pressure GM to distribute part of this liquidity to shareholders (as he did with Chrysler), either through a dividend hike/special-dividend and/or a stock buyback program," JP Morgan analyst Himanshu Patel said in a research note this week. "We think a dividend cut risk is now notably reduced."
Pressure on GM to give as much of its cash as possible to shareholders would be risky, as it would make GM's balance sheet more fragile and raise the perception that the automaker could go into bankruptcy, Patel said. However, the threat of bankruptcy could also pressure the powerful United Auto Workers (search) union to make some concessions to GM, he added.
The union has questioned why it would renegotiate its contract with GM, which expires in September 2007, even as the automaker has warned that its $5.6 billion annual health care burden is growing at an unsustainable rate. GM's health care liabilities are mostly due to its restrictive labor agreement with the UAW.
"Any steps which reduce the company's liquidity and financial flexibility would be a negative for shareholders in the long run," Lehman Brothers said in a report this week. "In addition, any direction of cash from the company back to shareholders is likely to be viewed very unfavorably by the UAW."
GM has kept its dividend at a 50 cent per share quarterly payout since the first quarter of 1997, when it raised it from 40 cents.
With GM's depressed share price, the automaker's dividend yield stands at nearly 6.5 percent, the third highest rate among companies listed on the S&P 500 behind Citizens Communications Co. (CZN) and Maytag Corp. (MYG) By comparison, Ford Motor Co.'s (F) 40 cent per share annual payout yields about 4 percent.
"We see management putting a high priority on maintaining the $2 per share annual dividend, and we believe that helps contain the downside for the share price through the medium term," Prudential Securities said in a research report this week.