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Why Should Investors Care about Automakers’ Pension Obligations?

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Dec. 9 2016, Published 10:54 a.m. ET

Mainstream US automakers

The auto industry is very capital intensive in nature. It’s why automakers tend to utilize leverage intensely. For this reason, General Motors (GM) and Ford (F)—two legacy US automakers—also have high leverage positions. A high leverage position increases a company’s risk profile. For these automakers, the risk isn’t limited to just their leverage position. They also carry huge pension liabilities with them.

Before we discuss this more, let’s take a quick look at why investors should care about automakers’ pension obligations.

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Why should investors care?

Due to a lack of awareness, understanding pension liabilities is challenging for investors, especially for retail investors. During the most recent economic crisis, the heavy burden of pension liabilities played a key role in driving giant companies including General Motors towards bankruptcy. Making an investment decision by ignoring a big risk factor such as pension obligations could lead to a disaster.

Automakers (XLY) General Motors and Ford are among the top-five US companies with astounding pension obligations. As a result, it’s important for investors to pay close attention to these automakers’ balance sheets.

Other US companies with huge pension liabilities are General Electric (GE), Boeing Company (BA), and IBM (IBM).

Series overview

In this series, we’ll discuss the pension obligations of two largest US automakers—General Motors and Ford. We’ll explore the different types of pension plans available and recent changes in these plans. Later in the series, we’ll find out how small changes in discount rates make a big difference in a company’s pension obligations.

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