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
In my opinion, General Motors
Well, here are GMAC's numbers compared with CIT Group
Valuation No. 1: P/E ratio
GMAC earned $2.913 billion in 2004. Multiply that by the average P/E ratios of the competitors, and GMAC could be valued at $30.6 billion on a trailing 12-month basis. GMAC could earn $2.916 billion in 2005 ($729 million times four quarters). So $30.6 billion could be a forward-looking value, too.
Valuation No. 2: P/B ratio
Before you say anything, let me tell you that I am not even thinking of valuing GMAC's book value of $22.4 billion at a P/B ratio of 2.2 from the table above. Those businesses are much more valuable than GMAC, and the market recognizes that. But GMAC does not deserve a P/B ratio of 0.6.
GMAC's assets are real and valuable. Let's say the P/B is 1. That gives a valuation of $22.4 billion to GMAC. So, GMAC could be worth between $22.4 and $30.6 billion by itself. GM's market capitalization is $14.6 billion, a 35%-53% discount to GMAC's value.
We can worry about the dividend cut, but I don't think it's likely with $26.4 billion stuffed in the mattress. We can worry about bankruptcy, but getting the car business closer to breakeven should mitigate those fears. It's not an easy task, but not all of GM's product lines stink. Light trucks and SUVs are still popular and sales in China are growing.
That said, new GM investors could be well compensated for taking a risk, swapping the milking cow for some magic beans, and buying GM shares. And they can earn 7.7% while waiting for the market to realize GMAC is the golden goose.
A study estimates pension and other retiree benefits add $1,360 to the cost of every GM vehicle produced, $734 at Ford