GM Returns to the S&P 500, Moves Closer to Independence

<b class="credit">General Motors</b>2014 Chevorlet Camaro
General Motors2014 Chevorlet Camaro

General Motors' independence from the U.S. government is progressing ahead of schedule as the U.S. Treasury is selling off 30 million of its shares this week just as the automaker gets reinstated to the Standard & Poor's 500 Index.

GM's shares have been surging in recent weeks and are above its November 2010 $33 a share initial-public-offering price. An additional 20 million shares are being put on the market by the UAW's Retiree Medical Benefits Trust.

"The GM team has been working very hard to earn the business of customers around the world and to win the confidence of investors, and rejoining the S&P 500 shows we're very much on track," said GM CEO Dan Akerson in a statement.

GM's rising share price is, of course, good news for taxpayers. The higher the price the less the government loses in the overall bailout of the automaker. Indeed, the revenue the Treasury receives from the stock sale will help the government remain below the nation's $16.7 trillion debt limit, buying the Obama administration and lawmakers a bit more time to strike a deal to raise the debt cap and avoid a default.

GM shares on Wednesday opened down slightly at $34.90. At that price, the Treasury's sale would net $1.05 billion. The government would still hold 211.7 million shares after the public offering is completed, which would be valued at around $7.39 billion. The Treasury has recovered only $31.7 billion in bailout funds so far, with $17.7 billion still outstanding.

The U.S. Treasury bailed out General Motors and Chrysler in 2009 when the two automakers required a bankruptcy reorganization to stay in tact. With the financial markets in free-fall, and the U.S. economy tanking, there was no financing coming forth from banks or private-equity sources. So, against the wishes of Republicans, President Obama green-lighted bailing out the car companies from the Troubled Asset Relief Program (TARP). At the time of the bailout, the government admitted it wasn't expecting to ever be fully repaid for its investments into GM and Chrysler.

What will these moves by the U.S. Treasury and UAW mean to shareholders and the share price?

"The accelerated sell-down by the government should be viewed positively," said Joseph Spak, an analyst with RBC Capital Markets. "We believe (the Treasury exit) could be quicker - perhaps by the end of the year. This could open the door for additional capital actions including a potential dividend."

The automaker's return to the S&P 500 is expected to prompt stronger demand for its stock. Companies often benefit from a bump up in stock price when they are added to the S&P, in part because some funds that track the index need to hold the stock.

GM's fundamental financials are looking better too. The company reported net earnings of $6.18 billion in 2012. The first quarter showed a slowdown in earnings, but is expected to be made up over the course of the year through strong sales for GM's new pickup trucks amidst rising demand for trucks as the housing sector heats up again. GM has also had several new models click with the media and the public, such as Cadillac ATS, Buick Verano, Chevy Impala, as well as continued strong sales for models like Chevy Cruze and Buck Encore.

While its European performance is suffering along with every other carmaker, GM remains stronger in China than most of its rivals, while steadily improving in North America. GM shares have slightly outperformed Ford shares this year -- up 20 percent since the beginning of the year, compared with 18 percent for Ford. Both have out-performed the Dow Jones Industrial Average, which is up 11.6 percent since the start of the year through June 5.

Filed under: Automotive News, GM News