Big Dividends? Yes -- but General Motors' CEO Sees Growth, Too

Under CEO Mary Barra, General Motors' fundamentals are in great shape -- and, she says, GM is poised for earnings growth and high-tech leadership. Image source: General Motors.

It's no secret that the auto business is headed for some radical changes driven by new technologies. Those changes will hurt many of the big automakers we've known for the last century. But there will be a few old-school automakers that won't just survive, they'll thrive in the new high-tech self-driving world.

Which ones? This might surprise you, but CEO Mary Barra has General Motors (NYSE: GM) better positioned than most investors realize to not only survive, but to grow significantly as the new high-tech world unfolds.

GM also pays a great dividend, with a yield around 4.8% at recent prices. Right now, those prices are surprisingly low -- especially if, as Barra maintains, GM turns out to be an earnings-growth story too.

Barra: GM offers investors both growth and a dividend

During GM's second-quarter earnings call, Barra was asked whether she thought potential investors should view GM as a dividend stock or as a potential earnings growth story. She responded:

Is Barra right? Is GM poised to deliver growth as well as dividends, even as the auto industry undergoes a high-tech transformation?

I think she has a good case. Here's why.

GM is emerging as a tech powerhouse

Under Barra, GM has become a steadily profitable global auto giant with a rock-solid balance sheet. But it's more than that: GM is aggressively (and credibly) pursuing leadership in the emerging technologies that could turn the industry on its head.

Ride-hailing? GM owns a big stake in Lyft, makes vehicles available to its drivers at affordable rates, and is collaborating with Lyft on a series of technology tests. Car-sharing? GM's Maven is a fast-growing rival to ZipCar -- and, like Lyft, it's introducing lots of young urban folks to GM's best new models.

Self-driving cars? It's believed that GM's technology just took a big leap forward with its acquisition of San Francisco start-up Cruise Automation -- a big enough leap that GM and Lyft say they'll roll out a pilot self-driving taxi service within months.

Electric cars? Tesla Motors has promised that its $35,000 Model 3 will have 200 miles of range when it goes on sale, hopefully by the end of 2017. GM's Chevy Bolt EV may lack the Tesla's sexy styling (it's intended as an urban runabout, not a sports sedan), but it matches the range, the price, and the technology -- and it's going into production in a few months.

GM is gearing up to begin production of the electric Chevrolet Bolt in the fourth quarter. Image source: General Motors.

By the way, GM has said that the Bolt was designed from the start to be a platform for all sorts of future technologies, including self-driving systems. It's expected to be the vehicle that GM will use in the upcoming pilot program with Lyft.

The takeaway: More than just about any other major automaker, GM is establishing a leadership position in the emerging technologies that will transform its business.

GM's "legacy" business is also in great shape

The new technology is exciting, but GM's current business is also in great shape. Quality is way up, profit margins have been exceptionally strong, demand for GM's trucks and SUVs has the automaker running its factories flat-out, and GM's cash hoard exceeded its modest and well-structured debt load by $9.3 billion as of the end of the second quarter.

Aside from the 2014 earnings dip related to the recall mess, GM's quarterly pre-tax profit margin has been trending upward for several years. Last quarter's was a record. Data source: General Motors.

What's more, GM is actually positioned to grow, even aside from the technological revolution that might be coming: Those margins are likely to get even stronger over the next several years, as the company continues to execute on several initiatives intended to boost profits significantly (and sustainably) by early next decade, including a dramatic $11 billion overhaul and expansion of its high-profit Cadillac luxury brand.

So why is GM cheap right now?

Simply put, GM is cheap right now because investors are worried that the U.S. new-car market might be at or near its cyclical peak. If so -- if it declines, if the U.S. slides into recession -- GM's profits will get squeezed for a few quarters. There are also a lot of investors who haven't yet caught on to GM's moves to be part of the coming tech disruption of the auto industry (rather than a victim).

Right now, big sales of trucks and SUVs are powering strong profits for GM. High-trim models like this GMC Sierra Denali are exceptionally profitable -- and selling well. Image source: General Motors.

The concerns about the U.S. market are well-founded: Sooner or later, the U.S. will slide into a recession. But that's a short-term story. As a GM investor, I'm not too worried about it, not least because CFO Chuck Stevens thinks GM will be able to sustain its dividend payments through the next recession. For investors with a long-term mind-set who automatically reinvest dividends, a recession that could push GM's share price down for a while turns into a dollar-cost averaging opportunity.

The upshot: A patient investor could find a lot to like with GM

It's not often that you can point to a century-old industrial company and say there might be an earnings-growth story unfolding. But here it, and it's trading at a dirt-cheap valuation -- especially when you consider the dividend.

An investment in GM will require patience. It's not for someone looking for a quick ten-bagger. It could be five to seven years, maybe more, before this story fully unfolds. But if you buy at current prices, reinvest that dividend, and resist the temptation to sell when the market hits bumps, you might be very happy with the result in time.

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