Can This Automaker Go From Good to Great?

By Markets Fool.com

Few companies are as infamous today as General Motors . Many Americans believe the government's bailout of Detroit's largest automaker was unjustified and the company should no longer be in business. Even more Americans believe GM was nearly criminally negligent when problems with ignition switches led to tragic deaths and resulted in nearly 27 million vehicles being recalled in the U.S. alone last year.

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Both of those beliefs are fair. However, investors also can't dismiss how far the automaker has come in improving its business over the last six years. Let's look at what makes General Motors a good investment and what will it take for this automaker to become a great investment.

Contender or pretender?
About a decade ago, Detroit automakers were notorious for producing gas-guzzling SUVs and full-size trucks. Those sales came with juicy transaction prices and generated significantly better profit margins than sales of passenger cars. As a result, these companies' passenger cars were often low-quality rides that consumers avoided like the plague. When gas prices eventually soared, Americans turned in their SUVs for small cars and General Motors felt the pain because it wasn't nearly as competitive in many car segments -- eventually needing a massive bailout from the U.S. government.

Today, General Motors still makes big bucks from selling its trucks and SUVs, but it also is a contender in passenger car segments that Toyota Motor Corp and Honda Motor Co. have historically dominated. For instance, GM's Chevrolet Impala scored a 91 out of 100 in Consumer Reports "10 Top Picks of 2015." That score was the second highest of all the segments' top vehicle choices, and it was one of only three vehicles to crack a score into the 90s -- the other two being Tesla Motors's Model S and Audi's A6, both of which carry a significantly higher price tag. Also, General Motors' Buick brand checked in as Consumer Reports' seventh-best brand in this year's "Brand Report Card."It was the first time an American brand cracked the top 10.

As General Motors' vehicle lineup continues to improve in the eyes of consumers and critics, the automaker is also finding more global success. Consider that China, which is already the world's largest automotive market and still one of the fastest-growing, is responsible for an increasing amount of profit for GM.


Chart source: General Motors' Driving Shareholder Value presentation.

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Looking beyond General Motors' improving sales and profits in the two most important markets, the U.S. and China, the automaker recently took steps to return more value to shareholders.

General Motors announced last month it will increase its quarterly stock dividend to $0.36 per share, which will put the payout yield at roughly 3.7% when the change takes effect in the second quarter. General Motors didn't stop there -- just last week it announced and authorized a $5 billion share repurchase program.

Via dividends and share repurchases, General Motors intends to return roughly $10 billion to shareholders through the end of 2016, which makes owning shares of Detroit's largest automaker much more intriguing, though I have some reservations on the subject.

Those are just a few reasons that make General Motors a good investment, but what would make it a great investment?

Pension and Cadillac woes
Looking at General Motors' sales by brand emphasizes where a large improvement is needed. Consider that Chevrolet, GMC, and Buickposted year-over-year respective sales gains last year of 4.4%, 11.3%, and 11.4%. Meanwhile, sales of General Motors' luxury Cadillac brand fell by 6.5%. Owning a successful global luxury brand is key to driving higher transaction prices, revenue, and margins; but Cadillac is underperforming at a time when sales of many luxurybrands are surging in the U.S.


Chart by author. Information source: company sales releases.

However, the automaker plans to pour $12 billion into the struggling brand. That capital should help bring eight new global Cadillac models to the road by 2020 and two more after that year. If successful, these new models will help turn one of GM's current weaknesses into a strength.

Another factor that General Motors needs to shore up is its underfunded pension plan to help bring down its billions of financial obligations.GM's crosstown rival Ford Motor Co. has poured more than $9 billion of cash into the fund, which has brought its underfunded status from nearly $19 billion in 2012 down to $9 billion at the end of 2014. General Motors has not followed suit, and the result is predictable: At the end of 2014, GM's underfunded status had increased $4.3 billion from the prior year to a staggering $24 billion obligation.

If General Motors can reduce the massive pension fund obligation and produce successful new Cadillac models over the next few years, the automaker will very likely have have gone from a good investment to a great one.

The article Can This Automaker Go From Good to Great? originally appeared on Fool.com.

Daniel Miller owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.