4 Big Things General Motors Wants Investors to Know

Executives at General Motors (NYSE: GM) have been hammering a theme in presentations to investors over the last couple of years: GM, they have been saying, is a "compelling investment opportunity."

Lately, they've stepped it up: In a presentation earlier this month, CFO Chuck Stevens said that GM is now a "more compelling investment opportunity." Why? In part, he said, it's because of the ways in which GM's current leadership team allocates capital.

Did he make a compelling case? Let's take a look.

Disciplined capital allocation

Stevens and other GM executives often refer to GM's "disciplined capital allocation framework," as summarized by this slide:

In a nutshell, GM wants investors to know four things:

• Its management team is thinking in terms of generating a return on invested capital (ROIC) greater than 20%.
• It is committed to maintaining an average cash balance of $18 billion to ensure that it can continue to invest in new products and technologies throughout a recession, when its profits may be squeezed.
• It is committed to maintaining the investment-grade credit rating it regained following its 2009 bankruptcy, to ensure that it has access to capital when opportunities (or challenges) arise.
• It will consistently return excess cash to shareholders. 

Let's look at each.

ROIC

The focus on ROIC is noteworthy for veteran investors because it's a sea change for GM. Before GM's restructuring, its management teams tended to focus primarily on sales and market share, not profitability. This is a shift that CEO Mary Barra and Stevens have worked hard to emphasize over the last few years.

The message now, Stevens said, is that it's paying off:

That improvement in ROIC has been driven by two things, Stevens said: improved operating performance (meaning better profit margins) and ongoing efforts to cut investments in products or businesses in which GM isn't earning a sufficient return. (A big example: GM's decision earlier this year to sell its German subsidiary Adam Opel AG, long a money-loser.)

Cash balance

GM has learned an important lesson from recent history: Automakers with cash reserves to spend on new-product development during downturns are the ones that have the most competitive products in showrooms when the economy improves.

GM went bankrupt during the last major recession, in 2009. But rival Ford Motor Company (NYSE: F) had borrowed a huge sum a few years earlier. When buyers began to come back to showrooms in 2011 and 2012, Ford had much-improved new models like the Focus and Explorer on offer, as well as updated versions of its huge-selling F-Series pickups. The result: Ford gained market share at the expense of rivals like GM, which had cut their new-product development programs during the downturn and were stuck with dated products when things improved.

With its $18 billion cash balance, GM is making a simple point: It's not going to let that happen again.

Investment-grade balance sheet

This point is also simple: Access to credit at affordable rates is vital for a healthy business. If GM can sell investment-grade bonds, it can afford to make acquisitions as opportunities arise; it can also maintain an ample line of credit to backstop that $18 billion cash reserve in challenging times.

Returning cash to shareholders

As Stevens explained, GM sees its ongoing emphasis on returning excess cash as an important component of its investment case.

Note that GM uses both dividends and share repurchases to return cash to shareholders. Why the mix of methods? It has to do with the cyclical nature of the auto industry. GM pays a steady dividend (yielding about 4.3% at current share prices), set at a level that the company can comfortably continue to pay through a downturn (as long as its cash reserve holds out).

When GM has excess cash above what it needs to pay the dividend, it uses share buybacks to "return" that cash to shareholders by reducing its number of shares outstanding. That practice should -- all other things being equal -- increase GM's earnings per share (because there are fewer shares outstanding), which in turn should help the share price to rise over time.

The upshot: Did Stevens make the case for GM's stock?

Is GM stock a buy? On the one hand, the management team's commitment to shareholder- and growth-friendly practices is a strongly bullish sign, and the dividend is a big plus. On the other hand, as Stevens acknowledged later in his presentation, a downturn that will squeeze GM's profits for a while is inevitable (but it's not an existential threat, as it might have been in the past.)

Like other big automakers, GM is also at some risk from technology-enabled disruption, though a good case could be made that GM is in better shape than most of its rivals on that front.

Long story short: I think GM's commitment to profit growth and shareholder-friendly practices is a compelling reason to invest. I also think that a new investor could do a lot worse than to buy GM now and commit to reinvesting its dividend through the inevitable downturn, building a larger position that will gain value during the eventual recovery.

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John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool has a disclosure policy.