What Do Disney And GM Have In Common? Lousy Stock Reactions to Dividends.

Shares were trading at about $92.50 before the announcement, and they stood at $92.40 in late trading Friday.

GM increased its dividend this week. The company will now pay 12 cents a quarter, up from nine. GM also announced a $10 billion share buyback. The company has already spent about $7 billion of the $10 billion repurchasing shares.

Its stock fared a little better than Disney’s. GM shares are up 12% since the announcement, but that still leaves them down about 20% over the past 12 months. What’s more, with the stock that’s already repurchased, GM now has roughly 1.1 billion shares outstanding, about 17% less than the nearly 1.4 billion that were outstanding before the buyback.

That means GM stock trades for 3.9 times estimated 2024 earnings per share. Before the buyback, shares were trading for about 4.7 times earnings. The stock got cheaper after good news. That doesn’t seem to make sense.

The stock market is supposed to discount all available information into stock prices immediately. That’s the theory, anyway. Maybe the market knows something about Disney and GM that just isn’t apparent such as cash flows deteriorating to the point that the dividends aren’t sustainable. Possibly.

Investors might also be scarred by history. There is some reason to be gun-shy. GM suspended its dividend in March 2020 amid the pandemic, and Disney suspended its payout in December 2019.

Before the suspension, GM was paying 38 cents a share each quarter, while Disney was paying 88 cents. Disney’s payout is now, essentially, 15 cents a quarter, which gives the stock a yield of 0.6%. GM stock’s new dividend yield is about 1.5%.

Another reason that either stock might not be doing better is the yields are low. The
S&P 500
yields roughly 1.8%. Among the roughly 400 companies in the S&P 500 that pay dividends, the average yield is almost 3%. Neither yield is up to snuff yet.

Back when Disney was paying about $3.50 a year, shares were yielding 2% to 3%. GM stock was yielding about 4% in late 2019.

Those are the payout levels that would get investors more excited, but investors shouldn’t ignore both stocks. The payouts should rise, and there is more to cash return to shareholders than dividends. For example, GM has been buying back stock for years.

That is a good way to return cash to shareholders, and it should lead to higher stock prices. If, for instance, GM stock were still trading at 4.7 times earnings, shares would be almost $40 a piece. Then investors can sell a little stock and create their own income stream, like a dividend payout, while keeping their total position size in GM stock flat.

That is theoretically true, but GM stock just hasn’t gone up over time. Not yet anyway. Shares are still at levels they traded at around 2013.

Maybe GM should pay more of its cash flow as dividends. That could help the stock, by getting income-oriented investors more interested in shares.

Write to Al Root at [email protected]