Increasingly important in the growing debate over what help, if any, should be extended to the Chrysler Corp. is the issue of what measures the nation's third-largest auto manufacturer has taken to help itself.
One such measure -- belated in the view of some analysts -- was announced yesterday when Chrysler directors voted to omit a third-quarter dividend on common stock.
Although Chrysler suffered a net loss of $205 million in 1978, the company paid dividends on common stock of 85 cents a share (a total of $52 million) and $1.28 a share on preferred stock (a total of $12.8 million).
In the first half of 1979. when Chrysler posted a net loss of $261 million, the company continued to pay common stock dividends at a rate of 10 cents a share quarterly. Preferred dividends also continued at a cost of $14.5 million in the recent six months and a preferred payout of 68 3/4 cents a share was approved yesterday for the third quarter.
Normally, companies strapped for funds (Chrysler's working capital position has eroded substantially over the past year) stop making payouts to stockholders as soon as directors are aware of problems.
But not always. Take the case of Penn Central, which collapsed in mid-1970 as the biggest American business failure. In the year before bankruptcy, the Pennsy paid dividends of $43.4 million while it piled up a net loss of $121.6 million.
Only in the fourth quarter of 1969, with final collapse less than a year ahead, did the railroad company halt payouts that had been continuous for Pennsylvania Railroad owners over a proud century.
Congressional investigations disclosed subsequently that Penn Central was actually borrowing money to pay dividends. In the 1968-1969 period, the interest costs alone on these borrowings to pay dividends was $37 million.
Pennsy management told the investigators that dividends helped appreciate the value of stock in Wall Street.
Currently, Chrysler has about $750 million of short-term credit available and is using about $550 million, in addition to long-term debt of more than $1 billion. So it could be said that only with current borrowings has Chrysler been able to pay dividends.
But, according to analyst David Healy at Drexel Burnham Lambert Inc., "The fact that Chrysler still (paid) a small cash dividend on the common stock, given its losses and the cash flow shortfall, is mostly, we believe, a testimony to the triviality of the $26 million annual dividend requirement compared to the company's needs, which measure in the hundreds of millions."
Indeed, the short-term outlook is bleak. Going into the traditionally weak third quarter, chrysler has working capital of just $800 million compared with $1.15 billion a year ago.
Cash and marketable securities are down to $252 million from $676 million. By eliminating the third-quarter common stock payout, Chrysler saves $6.22 million.
Such figures rint warning bells because without new long-term financing in the next six months, Chrysler would be in violation of a $600 million minimum working capital requirement under the revolving credit agreement the company has with banks. The company is spending about$100 million a month and expects losses for the next year or so, at the least.
Analyst Healy sees an "ominous pattern" in the events of recent years, with respect to chrysler. Each of the past two declines in the national economy, in 1970 and 1974, produced a financial crisis for Chrysler during which the profitable Chrysler Financial subsidiary could not sell its commercial paper (corporate IOUS). This "raises some hard-to-answer questions about 'what happens to Chrysler' in the next down cycle," he observed.
Aside from "naive speculation" that General Motors Corp. and the government "won't allow Chrysler to go under," there are few answers in the financial community, he added. Possibilites short of bankruptcy include the sale of some remaining assets, tapping other credit sources and counting on success of new models.
In the end, however, Healy has advised investors that the outlook is "disturbing enough" that money managers should not, from a "prudent man" perspective, own Chrysler securities or hold them for clients "unless the very real risks of financial difficulty are clearly acknowledged."
Late Wednesday, Standard & Poor's reduced its ratings on Chrysler debt securities to B from A-2. And Moody's Investors Service withdrew its credit rating from the financial subsidiary, which means that firm probably will have to rely on bank borrowings in the furture. j
In terms of common stockholders, data provided in Chrysler's annual report for 1978 indicate that large institutional investors already have withdrawn from the scene. Chrysler had 63.6 million shares outstanding at the end of the year, owned by more than 210,000 stockholders.
But half of the stockholders are individuals (20 percent males, 9.5 percent females, 20 percent joint owner-ship) and only 2.5 percent of the shares were held by institutions. More than 20 percent of the shares were owned by stock brokers and more than 13 percent were owned by a stock ownership plan.
In attempts to keep Chrysler Corp. a viable entity for these owners, management of the firm has used a variety of ways to raise funds besides seeking government aid. The company is now asking Washington for $1 billion in cash advances against proposed future special tax credits as well as an extension of federal deadlines for gas efficiency standards. To expand a plant in Indiana, Chrysler also has proposed a $50 million farmers Home Administration loan.
While the first two proposals have drawn opposition from congressional leaders and Executive Branch officials, it is considered possible that some sort of large loan guarantee program will be backed -- providing the sort of assistance which saved Lockheed Corp. from the bankruptcy courts. Chrysler opposed this approach, because it means an additional debt burden.
In addition to cutting out dividends, Chrysler has arranged debts and other financings over the past two years, as follows:
Tapped a real estate subsidiary for $70 million (a 1977 dividend of $30 million plus a loan of $40 million last years).
Sold a new issue of preferred stock and warrants to the public in 1978 for $234 million.
Sold its major European companies in 1978 for $230 million in cash and a 15 percent interest in peugeot-Citroen, the acquirer.
Resumed selling stock to employes under a savings plan that netted $37.3 million in 1978.
Raised $94 million in new loans last year from long time lenders Prudential and Aetna insurance companies.
Borrowed $70 million in Canada.
Sold a 67 percent interest in a Brazilian subsidiary in return for $50 million in the operation there of Volkswagen.
Sold shares in an Argentine firm, as well as operations in Colombia and Venezuela, with proceeds undisclosed.
Sold a third of Chrysler's Australia subsidiary to Mitsubishi of Japan for more than $30 million.
Also, Healy said, the auto firm "induced its Chrysler Financial subsidiary into some unconventional money raising devices, "including the sale of its own European and Latin American operations and a long-term loan from Arab sources. In all, the auto firm raised $800 million in new money last year but "the magnitude of Chrysler's operating losses and car-redesign spending program is suggested by the fact that this $8000 million cash transfusion resulted in an increase during the year in net working capital of only $13 million," Healy concluded.
According to Chrysler Chairman John Riccardo, in remarks to reporters on Tuesday, "You couldn't write a tougher scenario for the third largest auto company . . . We're in a tough period, but we intend to make it with a little time and patience, and a lot of money, we have the programs to bing us back to profitability."
He said Chrysler has reduced costs by $500 million a year to become "as lean and effective as possible." In other words, he concluded, "we have taken all the steps that could be taken to make our own way, and to pay the cost of government regulations."
It is the latter point which is a key to Chrysler's appeal for federal aid Chrysler officers believe safety and pollution standards have penalized them more than the larger car companies and that this burden deserves some assistance in return.
Citing data from H.C. Wainwright & Co., Riccardo said it costs GM about $340 per car to comply with regulations compared with $620 a car for Chrysler, on a much smaller sales base.
"The message is clear," Riccardo said. "Auto regulations are having a double whammy effect on Chrysler's per unit costs -- and by virtue of our size, we're the company that is leastable to afford the skyrocketing costs of regulation to begin with."
Nevertheless, he continued, Chrysler moved ahead to meet the requirements only to be hit with "a gasoline hysteria that's unique to the U.S. and that hurts the markets where we're strongest . . . on top of that, we are now in a recession that makes all our problems worse."