General Motors (GM) reinstated its dividend last week, a move that was widely anticipated but nonetheless very welcome for long-suffering GM stock holders.
General Motors — which suspended its dividend in 2008 before eventually going through a bankruptcy reorganization — will pay 30 cents per share to shareholders of record as of March 28. At today’s price, that works out to an annual dividend yield of about 3%, which makes GM stock a relatively high-yielding large cap by today’s standards.
The GM dividend is the final plank in the company’s efforts to become a “normal” company again. GM was snidely called “Government Motors” after years of controversial government bailouts and direct ownership, but as I wrote late last year, the government sold off its remaining GM stock, and General Motors is officially free of government ownership.
I’m bullish on GM stock, and I expect it — along with most of the auto sector — to outperform the market in 2014.
Shares trade hands for just 9 times expected 2014 earnings and 0.35 times sales. Furthermore, while certain secular demographic trends — such as the aging of the baby boomers and the reluctance of Generation Y to spend on autos at the rate their parents did — are long-term negatives, there remains a lot of pent-up demand after five years of lackluster demand.
Despite the rip-roaring sales numbers of the major automakers, the average age of cars on American roads still hit an all-time high of 11.4 years in 2013, and while some of that aging is because of higher-quality manufacturing that allows cars to last longer, we should remember that these numbers are averages. That means that half of all cars on the road are more than 11 years old.
I’m willing to bet that more than a few of those could stand to be replaced.
GM Stock: A Dividend-Paying Stock, But Not a ‘Dividend Stock’
But while I love General Motors as a short- to medium-term speculative play, I do not consider it a good dividend investment. Let me tell you why.
An ideal dividend stock should have the following characteristics:
- Revenues and cash flows should be highly predictable, ideally outside of cyclical industries.
- The company should be financially strong with no realistic possibility of financial distress.
- The company should have a long, reliable history of paying its dividend.
- The dividend should be easily covered by current earnings (i.e. the company should have a low dividend payout ratio).
So, how does General Motors stack up?
On item #4, I would say GM stock qualifies. The dividend of $1.20 per share represents about half of General Motors’ most recent earnings per share, and I expect earnings to be significantly higher in the years ahead.
But on the other three counts, GM stock doesn’t make the cut.
All companies see their revenues and profits affected by the health of the economy, but the auto business is one of the most cyclical of any industry. It is very much feast or famine, the very opposite of, say, a Procter & Gamble (PG) or Johnson & Johnson (JNJ).
This alone is not a deal breaker. After all, some of my favorite dividend stocks — such as Microsoft (MSFT) and Intel (INTC) — are in volatile sectors that are highly-dependent on business spending. But it’s certainly a negative.
After its bankruptcy reorganization — which wiped out a large chunk of its debts — General Motors has a relatively healthy-looking balance sheet. At $32 billion, GM’s debt is not too much bigger than its $28 billion in cash and short-term investments. Yet GM still has one massive liability that bankruptcy did not sweep away — the $71 billion in pension liabilities for its unionized workforce. GM’s inability to control the demands of its workers was a major contributing factor to its loss of competitiveness and ultimately its bankruptcy … and I can’t credibly say that history won’t repeat itself here.
And as for longevity, GM is obviously lacking on that front. Its new dividend is a reinstatement … coming a few years after an elimination and bankruptcy.
Should you buy GM? Absolutely. But buy it with the portion of your portfolio set aside for speculative growth plays, and don’t plan your retirement around GM’s quarterly dividend check.
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Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long INTC, JNJ, MSFT and PG. Check out his new premium service, Macro Trend Investor, which includes a free copy of his e-book, The New Megatrend Investor: The Ultimate Buy-and-Hold Strategy That Will Make You Rich.