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General Motors tumbled close to a 52-week low Monday as industry analysts questioned the company's plan to pay several billion dollars to unload part of its huge pension liability.
THE SPARK: GM announced on Friday that it will offer lump sums of cash to 42,000 white-collar retirees, if they stop taking monthly pension checks. For the rest of its 118,000 U.S. salaried retirees and spouses, GM will buy a group annuity that will make monthly payments starting in 2013. That would relieve the company of $26 billion in liabilities.
GM plans to pump $3.5 billion to $4.5 billion in cash into the pension fund. The pension fund will then spend $29 billion to buy the annuity from Prudential Insurance Co. Retirees will get their monthly checks from Prudential starting next year. Across the globe at the end of last year, GM had pension obligations of $134 billion but only $109 billion available to pay them, a $25 billion shortfall.
THE ANALYSIS: Buckingham Research Group analyst Joseph Amaturo maintained his "Neutral" rating on GM and told investors that he does not think the move will improve GM's stock value because the company still has big pension liabilities. The pension shift will cut GM's total U.S. salaried pension obligation from $36 billion to around $10 billion. Amaturo noted that GM is paying about a 10 percent premium to Prudential to take on the pension liabilities.
Moody's Senior Vice President Bruce Clark wrote that the new pension plan frees GM from the volatility of pension investment returns, long-term interest rates and mortality rates of retirees. But he believes that comes at a cost.
"When all is said and done, the company's total underfunded pension liability will be reduced by only $1 billion. The aggregate underfunded liability will still be very large, at about $24 billion," Clark wrote.
The change appears to be positive for GM in the long-term, said Jefferies analyst Peter Nesvold. He added that the state of Europe's economy remains a dominant factor for investors in the short-term. GM's European operations lost $256 million before taxes last quarter, and seven of the 17 countries that use the euro are already in recession. GM is in the midst of restructuring the European Opel and Vauxhall brands.
Nesvold gives GM shares a "Hold" rating, and he has set a one-year price target of $25.
Investors have been hoping that GM would use some of its $31.5 billion cash stockpile to pay a dividend or buy back shares and boost the stock price.
GM spokesman Jim Cain said the company is running its business for the long-term by eliminating risk from pensions.
SHARE ACTION: Shares of General Motors Co. fell 90 cents, or 4.1 percent, to close at $21.11. The stock has lost about a third of its value from the $33 it was priced at when the company went public in November of 2010. The S&P 500 is up 10 percent over that same period. GM shares have traded between $19 and $32.08 in the past 52 weeks.