DETROIT (AP) — General Motors has rejected a proposal from investor David Einhorn to split its stock into two classes.
The plan from Einhorn’s Greenlight Capital hedge fund would create one dividend-paying stock and one “capital allocation” stock. The New York-based hedge fund intends to submit the non-binding plan at the GM annual shareholders’ meeting later this year, where it will also nominate four candidates for GM’s board.
Einhorn said Tuesday on CNBC that GM is only paying out a quarter of its earnings, which is unusual for a high-yielding stock. Some investors, he said, care only about the dividends, while others care only about the company’s earnings. The proposal would give those who buy the stock for the dividend what they want, and let other investors get capital appreciation based on earnings and stock buybacks.
The plan would pay the same money to the same people, giving everyone what they want, he said. “It doesn’t change anything else about what’s going on at the company,” he said.
But GM said in a statement Tuesday that the proposal creates “unacceptable risks” and is not in the best interests of shareholders. Among the risks are the potential loss of GM’s investment grade credit rating, unknown market demand for the new securities that could depress prices, and corporate governance challenges that would come from having two classes of stock with competing objectives.
Einhorn, however, said GM’s contention that a change would endanger GM’s credit rating a red herring, contending that ratings agencies don’t normally care about whether there are two classes of stock. Greenlight owns 0.88 percent of gm shares.
GM said its management has spoken with Greenlight numerous times during the past seven months, including a meeting between the hedge fund and GM’s board. The Detroit automaker said it consulted with ratings agencies and conducted a review with three investment banks.
Shares of GM rose just under 3 percent to $35.72 in afternoon trading Tuesday.
Two years ago, GM avoided a proxy fight with annual investors by starting its stock buyback program. Since then, GM has increased its earnings — profit reached $9.4 billion last year — and paid out more in dividends and stock repurchases. The company promised to return about $7 billion in cash to shareholders this year, bringing total cash returns in dividends and buybacks to about $25 billion since 2012. GM now pays a dividend of 38 cents per share, with an annual yield of 4.24 percent.
Still, Monday’s closing share price of $34.73 was about equal to the price two years ago. Now investors fear that the auto industry is approaching the peak of its earnings cycle as U.S. sales plateau after consecutive record years.
GM said the Greenlight proposal would not help the company sell more cars or drive higher profits, “nor would it address the fundamental sector factors affecting GM’s stock price.”
The company also said that its board unanimously decided against recommending any of Greenlight’s board candidates.
Einhorn said the proposal would unlock GM’s share value, and he accused the company of being closed-minded. “They approached the idea with the enthusiasm of a 7-year-old confronted with a plate of raw oysters,” he said.