General Motors: Big Dividends, a Value Price -- and a Growth Story, Too

By Markets Fool.com

CEO Mary Barra has GM on a surprisingly strong path to growth, yetthe Detroit giant's stock is still cheap. Image source: General Motors.

Continue Reading Below

Looking for big dividend payments? Searching for well-run companies at value prices? How about an earnings-growth story that has slid under Wall Street's radar?

How about General Motors (NYSE: GM)?

GM shares are cheap right now, and that makes thedividend yield look great. But a cheap stock is only a buy if it's undervalued. In this case, there's good reason to think that GM is cheapbecause of some short-term concerns about the new-car market, but its longer-term prospects looksurprisingly bright.

During last month's earnings call, CEO Mary Barra said she thought investors should look at GM's shares as both a dividend playandan earnings-growth story. That may sound far-fetched, but she has a strong case on both fronts. Here's why.

General Motors' shares are cheap right now

Continue Reading Below

GM is trading at just about 4 times trailing twelve-month earnings. Even for a century-old automaker, that's cheap: The historical norm during good times is more like 10 times earnings. And at current prices, GM's dividend yield is about 4.9%.

GM expects to sustain its dividend through the next downturn

That 4.9% dividend yield is impressive, but it doesn't mean much if GM has to cut the dividend as soon as the economy slows. Autos are a cyclical business: Profits rise during good times, and fall as auto sales slow during recessions.

That's a big part of why GM is cheap right now: Investors are worried that the important U.S. new-vehicle market appears to be peaking. But we're Fools, so we know that there are big benefits to taking a longer view.

Historically, GM and its Detroit rivals swung to steep losses during recessions. That probably won't happen at GM next time: GM has lowered its costs enough that it expects to be profitable as long as the annualized pace of auto sales in the U.S. stays above 10.5 million. That's a very low level: Even during the 2008-2009 economic crisis, the pace of U.S. auto sales only fell below that line for about three quarters.

Even if GM doesn't post losses during the next recession, its profits will be squeezed. But GM is prepared: CEO Mary Barra has committed to maintaining a cash reserve of at least $20 billion so that GM can continue to fund new-product development and other obligations through the next downturn. CFO Chuck Stevens recently made clear that those "other obligations" include GM's dividend.

If the recession were to be very severe and protracted, if GM were to burn through that entire $20 million reserve, it would fall back on its $14 billion in revolving lines of credit. I would expect the dividend to be cut if it got close to that point. But note that GM's capital expenditures totaled $7.8 billion in 2015: As long as GM doesn't dip too far into the red, that cash reserve could hold GM through a recession that lasts for two years or more, even without cutting costs significantly.

GM is an unfolding earnings-growth story

In October of 2014, Barra laid out a plan to boost GM's adjusted pre-tax profit margin to between 9% and 10%, sustainably, by "early next decade."

The plan has several components. You can see the details here, but briefly, it includes: big investments in technology, a $12 billion investment to transform Cadillac into a global luxury powerhouse, further growth in China, a boost for GM's in-house financial arm, and a series of moves to realize more operating efficiencies by better harnessing the benefits of GM's huge global scale.

If that sounds complicated -- well, it is. Here's the takeaway: It's already working.

When Barra announced the plan in the fourth quarter of 2014, GM's margin was 6.1%. Last quarter, it was up to 9.3%.

High-profit products like this GMC Sierra Denali pickup are powering big profit margins for GM right now. GM is preparing to sustain those margins even if truck sales fade. Image source: General Motors.

That 9.3% profit margin might not yet be sustainable (for now at least, it's a record). But it illustrates that it's achievable, and that GM has already made a lot of progress toward its goal.

Barra said last monththat investors should be thinking of GM as anearnings-growth story. As GM's sales and efficiencies grow, its profits could rise another 40% or more from (very good) 2015 levels over the next five to seven years, even if there's an economic downturn between now and then.

One other point, in case it it isn't clear yet: Barra and her team are proving to be superb investor-focused stewards of General Motors. This is a very, very different company from the old GM.

The upshot: A lot for patient investors to like

I could go on and on about the good things happening at GM -- how its quality is now on par with its top Japanese rivals, about Barra's Buffett-like approach to value and fundamentals, about GM's surprisingly aggressive moves to out-disrupt potential Silicon Valley "disrupters"...but you get the idea.

Want a ride in a self-driving car? GM and Lyft will make it possible within a year -- in a Chevrolet. GM is now testing self-driving Chevy Bolts in San Francisco. Image source: General Motors.

Technology will soon bring huge changes to the auto industry. Not all of the big automakers will thrive in the new world. Right now, GM looks to be better positioned for the future than just about any other automaker, and it's doing a very good job of executing in the current environment as well.

To sum up: It's solidly profitable, its balance sheet is in great shape with just $10.8 billion in well-structured debt, it's prepared for the next downturn, it's emerging as a leader in future technologies, it has a great management team and a credible earnings-growth plan -- and it's cheap.

You'll have to be patient. It might take a while for that bottom-line growth to really show. But you'll get a great dividend while you wait. If you reinvest that dividend and hold on through the inevitable turbulence, you could be very happy with the result in five to seven years.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

John Rosevear owns shares of General Motors. The Motley Fool recommends General Motors. 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.