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Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’s Lex column.
Stock buybacks are the perfect target for the United Auto Workers. The freest of free cash flow, they may as well be a billboard saying: “So many dollars, we don’t know what to do with them!” In the minds of many, they also look like giveaways to the very wealthiest who own many of the stocks being bought, and carry a whiff of financial engineering shenanigans, juicing earnings to the benefit of bosses’ bonuses.
All of which offers a reason for the Big Three to consider meeting the UAW halfway on this one.
One of the UAW’s demands in its fraught negotiations with Ford Motor Co., General Motors Co. and Stellantis NV is that its members get a share of any stock buybacks, special dividends or increases in ordinary dividends. The figure talked about is $2 per worker for every $1 million of such distributions. Given billions in buybacks over the past decade or so, those $2 tithes could mount up.
For investors, however, what’s been paid over the past decade isn’t the issue. Rather, the question is how much this would cost going forward and how that compares with other demands being made by the union. Looking just at GM and Ford, their buybacks, special dividends and dividend increases over the past four quarters add up to about $6.3 billion. Using the $2 number for just over 100,000 UAW workers at the two companies implies a payment of about $640 million. That is roughly equivalent to a 4 percent to 5 percent increase in hourly pay and benefits, or around 3 percent of operating profit.
Some investors are reportedly fine with diverting some of Detroit’s distributions to its workers, according to Bloomberg News. Altruism? Without wishing to be overly cynical, there may just be a good negotiating stance here for both sides.
Tying some UAW pay to profit sharing is both an established practice and, philosophically, good sense. The automakers have had an exceptionally profitable couple of years in North America, expressing that not only through buybacks and dividend increases but big pay packages for executives. Meanwhile, the inflationary burst behind that cut deeply into their employees’ real earnings. It is just a difficult case to make that you must keep a lid on costs to fund the (subsidized) transition to electric vehicles while also significantly raising payouts, especially buybacks, to shareholders. The symbolism of sharing the largesse as a way of making up for this imbalance shouldn’t be overlooked and would represent a win for the UAW’s leadership.
It could also be good for the automakers. For all their supposed nefariousness, buybacks aren’t that different from dividends, but they do have the advantage of being more discretionary than dividends (in theory, both are discretionary but try telling shareholders a dividend isn’t sacrosanct). An extra 5 percent on wages is kind of like a higher dividend — tough to take back. But the equivalent tied to buybacks is more under the control of management. If some sort of tithe can be offered in exchange for other demands, particularly those that raise costs structurally, then that could also be a useful outcome for the automakers.
It is worth pointing out that the benefit of higher buybacks for the automakers isn’t exactly clear, anyway. For example, GM’s expansion of its buyback program and restoration of dividends in the third quarter of 2022 hasn’t resulted in sustained outperformance for the stock. Indeed, its most recent bout of weakness can be fairly attributed to the anticipation and then realization of the UAW strike.
Little wonder investors might be amenable to trading some of their buybacks for the union’s buy-in. Detroit’s stock repurchases come and go, but the UAW is a fact of life.
