Goodyear's Capital Allocation Plan for 2014-2016 - Analyst Blog

The Goodyear Tire & Rubber Company GT updated its capital allocation plan for 2014 to 2016. Under this new plan, the company intends to increase shareholders' returns and expects favorable impacts from opportunities in North America and Latin America.

Goodyear recorded strong cash flow in 2013. As a result, the company was able to pay off the entire pension fund of $1.15 billion. Thus, the company has plans to reallocate around $1.1 billion of its 2014–2016 cash flow.

With this fund, Goodyear plans to enhance shareholders' value, strengthen the balance sheet and invest in projects with high rate of return. The company has increased its allocation for capital expenditures by $300 million. This will be utilized for building a new plant which will serve the company's North American and Latin American consumer tire businesses. Goodyear expects the high-value-added consumer replacement and original equipment tire markets in these two regions to grow.

Next, in order to enhance shareholders' returns, Goodyear will hike its dividend payout and increase its share repurchase authorization. It plans to boost its dividend by 20% to 6 cents per share from 5 cents from Sep 2014. This will raise the company's dividend payment to 22 cents for 2014 and 24 cents per share for 2015.

Moreover, Goodyear will be expanding its share repurchase program by $350 million. This will enable the company to repurchase shares worth about $450 million by 2016. Goodyear may augment shareholder returns by an additional $250 million, making a total return of $900 million, depending on its performance.

Goodyear will be allocating an additional $400 million for debt reduction. This will improve Goodyear's leverage metrics and support the company in achieving an investment grade credit rating.

Goodyear is witnessing a rising demand for its tires in North America and Latin America. In order to maintain its leading position and enhance its earnings beyond 2016, the company plans to invest $500 million to construct the new plant.

This plant will have advanced technology and an initial production capacity of about six million tires per year. Goodyear will increase the capacity depending on the demand. However, the location of the plant is yet to be finalized and the production will initiate from the first half of 2017.

For the period 2014–2016, Goodyear reaffirmed its target of a 10–15% increase in annual segment operating income. The company also targets achieving positive free cash flow from operations per annum during this period. Moreover, the company expects a 2–3% increase in unit volumes in 2014.

Goodyear Tire is one of the largest tire manufacturing companies in the world. The company currently retains a Zacks Rank #3 (Hold). Gentherm Inc. THRM, Modine Manufacturing Co. MOD and Magna International Inc. MGA are some better-ranked stocks worth considering. Gentherm and Modine carry a Zacks Rank #1 (Strong Buy), while Magna is a Zacks Rank #2 (Buy) stock.