In these days of paltry dividend yields -- the S&P 500 throws off just 1.8% these days -- getting almost 8% from a company on the Dow Jones Industrial Average sounds pretty enticing. Which is why many investors are taking a look at General Motors. The company's stock-price plummet has driven the yield up to 7.7%. Many of my Rule Your Retirement subscribers have been asking whether such a juicy yield is worth the risk of investing in GM.
To help answer that question, W.D. Crotty and David Meier take 20 paces and square off as dueling Fools. W.D. thinks GM has run out of gas, while David thinks there's something left in the tank. Read the arguments, consider the rebuttals, then vote. -- Robert Brokamp
I have several General Motors (NYSE:GM) retirees as friends, and they periodically ask, "Is GM a buy?"
The cute and fast analysis is that GM is losing money and the sharply reduced 2005 earnings outlook has now been withdrawn. It doesn't look good.
The case for GM is that there are 565 million shares outstanding and $341 of revenue per share. Compare that to Microsoft (NASDAQ:MSFT) where there are almost 11 billion shares (20 times the shares) and $3.53 of sales per share (1% of the sales). GM offers tremendous leverage.
The problem at GM is the miniscule 0.4% operating margin -- although it produced $6.40 a share of earnings in 2004. Imagine the earnings if GM reached the 9% margin at Toyota (NYSE:TM).
The case against GM starts with the cash outflow of $7.3 billion in the last two quarters. To turn a phrase, fasten your seat belts because the company is hemorrhaging cash.
While GM is making changes to accelerate product development, branding all models with the GM logo, and advertising why GM vehicles are beneficially different, I don't buy the company line on revenue or costs.
The company says its revenue strategy has "begun to play out," but worldwide vehicle revenue in the first quarter declined 4.3% -- hardly heartening.
Speeches are being made about GM's competitive needs and the (said to be excessive) $5.2 billion in U.S. health-care costs in 2004. Consider this. North American vehicle operations lost $1.6 billion last quarter. Health-care costs could have been zero and operations still would have missed profitability. Margins need to improve, but there is much more work needed in all expense categories.
So, what about GM's financial unit, GMAC?
In the first quarter, GMAC's net income fell 4.7% to $729 million. To put that into perspective, the first quarter's $2 billion loss for GM's worldwide vehicle operations is 2.7 times the profit at GMAC. When the vehicle operation catches cold, a healthy GMAC isn't going to save the day.
GM is struggling. The stock looks cheap until you consider earnings have crashed. The 7.6% dividend looks tempting, but it is certainly a candidate for trimming. Avoid an investment accident and don't buy GM with your retirement dollars until you can see a clear path to profitability.
Fool contributor W.D. Crotty does not own stock in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
Rebuttal
There is no clear path to profitability at the car company. So today, a good business, GMAC, is getting punished. But doesn't that make W.D.'s case stronger? I don't think so. I think what it does is drive the stock price down too far. The market is very depressed about the car business (and rightly so). But if you could buy the whole company, junk the car business and keep GMAC, your business would immediately increase in value because capital would stop getting misallocated. -- D.M.
Want to know how dividends fit into your retirement plan? Take 30-day free trial of Rule Your Retirement and receive the "8 Ways to Supercharge Your Retirement" special report. For more on General Motors, check out Motley Fool Income Investor and receive Mathew Emmert's latest report, "Dividend Time Bombs."
