Forget Ford's Lucrative Dividend. GM Has a Different and Perhaps Better Way to Reward Investors.

Investors might know General Motors (NYSE: GM) as an automotive giant hailing from Detroit, but the company could also be confused with a magic show with the way GM is making its shares disappear. General Motors has spent tens of billions on share repurchases that have significantly reduced its shares outstanding, in turn boosting earnings per share. Let's take a look at just how much GM has repurchased in recent years, and why investors might want to pay attention to what happens next.

Disappearing act

Below you can see just how impressive GM's share-disappearing act has been, particularly since 2023.

Data source: General Motors' Q3 earnings presentation. Graphic created by author with use of ChatGPT.

If that graphic wasn't compelling enough, consider this: Since the beginning of 2023, GM has reduced its shares outstanding from roughly 1.395 billion down to 849 million as of the third quarter -- a near 40% reduction.

While share buybacks don't guarantee a higher stock price, reducing the share count gives existing investors a larger ownership stake in the business and can help bolster earnings per share, potentially making the stock more attractive. It's not a coincidence that since the beginning of 2023 GM's stock price has soared almost 130%, which is even more meaningful when you compare it to rivals Ford Motor Company (NYSE: F) and Stellantis (NYSE: STLA).

GM data by YCharts

For GM's next trick

Investors tuning into General Motors' third-quarter report may have been surprised at the size of the new multiyear $20 billion share repurchase authorization. Let's take that a step further and do a very basic and simple exercise: Assume that General Motors' earnings will remain flat and the $20 billion will be spent repurchasing shares at an average of $80 per share.

That has the potential to reduce its current 849 million shares outstanding down to a hypothetical 599 million shares. If you do the math, that 29.4% reduction in shares could, in this basic exercise, increase earnings per share by 41.7%. To be clear, this is hypothetical potential and not a forecast, as markets, financials, or other things could change, or GM could find better ways to invest its excess cash flow for higher returns.

Image source: Getty Images.

To be fair, announcing a massive $20 billion share repurchase program is one thing, and generating the cash flow to execute it is another. The good news is that General Motors is practically printing money in large part thanks to lucrative and high-volume sales of its full-size trucks, as well as keeping incentives below the industry average. GM generated $5.9 billion in adjusted automotive free cash flow during the third quarter and ended the period with just over $23 billion in cash and cash equivalents. Further, management also raised its full-year 2026 adjusted automotive free cash flow guidance from a range of $9.5 billion-$11.5 billion to a range of $11.5 billion-$12.5 billion.

What it all means

While General Motors and Ford are the fiercest of rivals, they tend to approach business in similar ways. However, when it comes to returning value to shareholders they differ significantly, with GM focused on share buybacks and Ford focused on its well-known and lauded dividend. Morningstar's recent calculations for total yield, which includes the impact of buybacks combined with dividend yield, show GM's total yield at 12.59% and Ford's at 5.7%.

It's fair to say that Ford has received more attention and praise for its dividend over the years than GM has for its repurchases, but total yield should tell investors a different story and it should probably be more recognized than it is -- in my humble opinion.

Again, GM's massive $20 billion share buyback authorization doesn't guarantee a higher stock price, and GM's cash flow needs to remain a company strength, but if the Detroit automaker continues to execute as it has since 2022, the future should be bright for long-term investors. Sometimes the most meaningful value returned to shareholders isn't the most obvious.

Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors and Stellantis. The Motley Fool has a disclosure policy.