DETROIT -- General Motors will likely cut its high dividend within the next two years in a symbolic gesture to its largest union that workers won't be the only ones making painful concessions to resurrect the automaker, analysts said on Thursday.
A cut in the shareholder payout by GM, which last week warned that its first-quarter earnings would be its worst since it nearly went bankrupt in 1992, would also signal to bondholders that the automaker is doing everything it can to defend its debt rating from falling into "junk" status, GM debt holders said.
"It would likely be difficult for the UAW leadership to convince its members to accept concessions unless GM's problems were acute in our view. In this scenario, it is unlikely that the dividend could remain intact," Merrill Lynch said in a research note on Thursday.
GM, the world's largest automaker, is expected to ask the union for help as it cuts costs to offset falling U.S. market share.
GM gives its unionized workers health care benefits that are "way, way richer" than those received by salaried workers, GM Vice Chairman Bob Lutz said at the New York Auto Show this week. "Salaried health care benefits" should be shared by all, he added.
To win the UAW's cooperation, ahead of the September 2007 expiration of the current contract, GM will have to cut its annual $2 payout to shareholders, in addition to the cuts in white-collar jobs and benefits already announced, analysts said.
For that reason, the dividend will probably be cut before the end of 2006, Merrill Lynch said.
NOD TO BONDHOLDERS
A dividend cut would also indicate that the automaker is trying to prop up its debt rating, GM debt holders said. Standard & Poor's and Fitch Ratings warned last week that they could cut GM's debt to "junk" status at any time.
"It is not essential they do this now, but this is clearly a signal to the bond market they are doing everything they can to hold on to their investment-grade rating," said Mitchell Stapley, chief fixed-income officer for Fifth Third Asset Management in Grand Rapids, Mich.
The sharp drop in GM's stock price last week to the lowest levels in more than 13 years sent GM's dividend yield up to about 7 percent, the highest payout ratio of any company on the S&P 500.
But even at that level, GM's dividend yield ranged between 29 percent and 31 percent a year in the early 1990s, and remained at 10 percent or more until 2003, Merrill Lynch said.
Eliminating the dividend would save GM about $1.1 billion a year, a modest amount when compared with GM's cash holdings of more than $23 billion for its automotive operations, analysts said.
But cutting the dividend before next year, when GM rolls out its critical new lineup of full-sized sport utility vehicles, could "greatly undermine" perceptions about GM's confidence in products that are key to forecasts for an earnings rebound in 2006, JP Morgan said in a research note on Thursday.
GM Chief Financial Officer John Devine said last week that GM set the dividend at $2 years ago "very much with stability in mind."
"We continue to believe the risk of a GM dividend cut in 2005 is below 50 percent," JP Morgan said.
However, in order to restructure the business, GM will need to cut the dividend to win the union's cooperation, Lehman Brothers said in a recent note.
"GM's creditors and its major labor union will be aligned in demanding that equity holders share some of their pain," Lehman wrote.