GM Reinstates Dividend Well Below Pre-Covid Level as Spending on Electric Vehicles Ramps

After a two and half year hiatus, General Motors reinstated a new quarterly dividend policy that will resume payments next month with a conservative payout ratio of about 5%.

The dividend has been restored at a significantly reduced rate, around 75% lower than pre-pandemic levels, to allow the automaker to retain enough financial flexibility to fund its capital-intensive electric vehicle (EV) development and battery manufacturing.

Through 2025, GM estimates it will spend more than $35 billion on these projects, or roughly $9 billion annually. For comparison, that's over 16 times more than the just-announced dividend policy and more than 3x the company's most recent full-year payout in 2019.

While some believe the reinstated dividend yielding around 1% is too low when compared to cross-town rival Ford's payout yielding about 4%, by many accounts, GM may need to retain that financial flexibility as competition in the electric vehicle space intensifies among startups and well-established car companies.

Even though demand for EVs continues to outpace supply, with a growing number of government policies enacted to expand the adoption of green-energy vehicles, profitable electric vehicle production remains elusive for most. The sole exception seems to be the industry leader Tesla, which sold about 13 times more EVs than GM and Ford combined in the first quarter of this year.

As the industry evolves, there is a lot of pressure on the over 100-year-old General Motors to make substantial progress in its electrification efforts – especially considering Ford has already introduced an electric version of America's top-selling truck, the F-150.

While lagging Ford in getting EVs to market, GM is deploying a strategy used in the early days of its century-old rivalry with Ford, which it believes will play out similarly. 

Around 100 years ago, Ford quickly became the world's largest car maker by churning out a high volume of Model-T's and producing few alternative models. Today, Ford has again raced ahead of GM in the electric space by focusing on just two models, the F-150 Lightning and Mustang Mach-E.

In contrast, GM's response to the early success of Ford's Model-T was to develop more choices for consumers with a broader range of models, ultimately overtaking Ford in size and sales. 

With a similar strategy today, management believes that by introducing 30 new EV models by 2025, ranging in size and price (from $30,000 to $100,000), it will once again overtake Ford and be Detroit's leader in electric vehicles.

It's too early to tell how these strategies will play out, but both companies face an uphill battle to become major players in the electric vehicle space. And the increasing risks of a possible recession, on top of inflation and a continued semiconductor shortage, will only make the competition more challenging.

But each company's long history and experience in mass-producing vehicles, coupled with existing portfolios of cash-flow-generating combustion-engine vehicles, should prove a considerable advantage over the many unprofitable startups facing a more daunting financing environment.

And with EV sales expected to soar through the end of the decade, and most market participants focused on high-end models, GM could be positioning itself well with an array of models that includes options for lower-disposable income consumers more likely to benefit from tax rebate programs.

Because GM restored its dividend at such a reduced amount, the Corvette maker has ample dividend coverage and could push through some modest payout increases in the years ahead while balancing the firm's expensive EV projects.

However, while GM boasts a strong balance sheet and a conservative payout ratio, the company has a history of cutting or suspending its dividend during recessionary periods. As such, we have initiated a Borderline Safe Dividend Safety Score for General Motors.

If GM proves it can provide a stable payout through the next economic downturn, we would consider reevaluating the company's Dividend Safety Score.

Until then, we will continue to monitor developments in GM's race to mass-produce electric vehicles.