GM: For Income and Growth

06/04/2004 12:00 am EST

Focus:

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Gordon Pape can describe his latest recommendation fairly easily. He says, "GM builds cars and trucks; that about covers it." With capital gains potential and a 4.6% dividend yield, he features the stock as his latest Income Buy of the Month.

"General Motors (GM NYSE) was founded in 1908 and is now the world's largest vehicle manufacturer, employing about 325,000 people globally. It has manufacturing operations in 32 countries and its vehicles are sold in 192 countries. In 2003, GM sold nearly 8.6 million cars and trucks, about 15% of the global vehicle market. GM also operates one of the world's leading financial services companies, GMAC Financial Services, which offers automotive and commercial financing along with an array of mortgage and insurance products.

"Why do we like this stock? GM is an income-producing security that is not interest-rate sensitive and also offers capital gains potential. Despite the challenges from overseas manufacturers (some of which it has acquired or has formed partnerships with), General Motors remains the colossus of the automotive sector. Although it is a cyclical company, its financial fortunes have improved in recent years and the company pays an excellent dividend, which should keep income investors happy while they await possible capital gains.

"Because GM is a major component of the Dow, the stock is closely watched by analysts. They have mixed views on the stock although none of the 18 analysts tracked by Thomson/First Call rates it as a sell. The majority of these analysts (10 of them) rate it as a Hold while eight consider it as Buy or Strong Buy. Their median target price for the stock is $52, with a high of $69 and a low of $47. The company recently reported good first-quarter results that showed earnings of $1.3 billion ($2.25 per diluted share), up 24% from the same period in 2003. Revenue for the first quarter rose 3.1% to $47.8 billion. The company increased its guidance for calendar 2004 to $7 a share, excluding special items and at current dilution levels. This compares with the previous target of $6 to $6.50 per share. Management has set a mid-decade target of earning at least $10 per share.

"There are risks. The auto business is cyclical and the history of this stock reflects that. Over the past five years, the shares have traded as high as $90+ and as low as the $35 range. So you need to be prepared for some volatility. Right now, the price is at the lower end of the five-year range. Automobile sales have been strong on the past couple of years thanks to low interest rates. Higher rates could have a negative effect, however that may be offset by the improving economy and the accelerating rate of job creation in the US.

"Meanwhile, the company pays a quarterly dividend of 50 cents a share ($2 a year) on a June, September, December, and March cycle. This translates into a yield of 4.6%. That’s an excellent return for a company that also offers capital gains potential. The quarterly 50 cent dividend has been paid consistently since 1997, so it appears to be very safe. Despite its very good first-quarter results, the stock has been in a slide recently after touching $55 early in the year. Although we consider this a higher risk investment, GM looks like good value at this level and the healthy dividend offers excellent cash flow. Overall, GM appears to be very well priced at current levels and offers a fine combination of above-average yield and capital gains prospects."

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