General Motors Company: 3 Reasons Why Warren Buffett Is Bullish on GM Stock
GM Stock a Top High-Dividend Stock
Many investors look at the actions of Warren Buffett and his company, Berkshire Hathaway Inc. (NYSE:BRK.A). Buffett is known as being the most successful investor of all time and is given the nickname the “Oracle of Omaha.”
There is a strict set of rules that Buffett follows before making an investment, which comes from years of experience. A few of these key factors are to own a business which has a steady and growing revenue, is selling at a discount, has a great management team, and makes shareholder-friendly moves.
One of Buffett’s largest holdings, and which should be considered for an ownership stake, is General Motors Company (NYSE:GM). Presently, Buffett owns 50 million shares of GM stock, which is valued at more than $1.7 billion. This would amount to slightly more than three percent of the entire company. (Source: “General Motors Company Institutional Ownership,” NASDAQ, last accessed August 4, 2017.)
Why is Buffett bullish on GM stock? And why might investors want to consider owning GM stock? Both of these questions will be answered below. Let’s take a look.
Steady and Growing Revenue
GM’s business is designing, building, and selling various types of vehicles and automobile parts. This generates a steady inflow of cash from business operations. The growth opportunity for GM is coming overseas from China. In July, there were 287,581 vehicles delivered to consumers in China, which was a new record.
The “Buick,” “Cadillac,” and “Baojun” brands reached record levels of sales. The Cadillac division saw an increase of 37% year-over-year growth and July marked the 17th consecutive month of double-digit growth. The SUV division saw the largest amount of growth, with 50% sales growth when compared to the previous year. (Source: “GM Delivers July Record 287,581 Vehicles in China,” General Motors Company, August 3, 2017.)
When there is a new vehicle unveiled, there is a pick-up of sales, which occurs annually. Also there are many consumers that lease their vehicles, which results in them acquiring another vehicle once the lease agreement is complete. When a vehicle is bought instead of leased, it is more of a one-time purchase.
However, there is more to the company, which contributes to recurring revenue once a vehicle leaves the dealership. For instance, there is a financing division, which provides financing needs to the purchaser of the vehicle in order to fund the cost of the vehicle. Of course, there are fees and interest costs associated with that, which are paid by the vehicle owner. This division earns a very steady and growing revenue. Over the past year, earnings before taxes are up 67%. (Source: “GM Reports Net Revenue of $37 Billion and Income of $2.4 Billion from Continuing Operations,” General Motors Company, July 25, 2017.)
Another part of the business that requires vehicle owners to visit the dealership network is the maintenance division. This part of the business is known as a high-margin business and would require vehicle owners to visit the dealership on a very frequent basis. This would include after-sale vehicle services such as oil changes, light repairs, collision repairs, and extended service warranties.
These additional services add to the top and bottom lines of the balance sheet, diversifying the way the business operates and how earnings are reported. For example, if there happens to be a slowdown in vehicle sales, then the financing and maintenance division would pick up the slack and continue to operate due to their naturally very steady business. Another reason why Buffett is bullish on GM stock is because of the valuation.
Cheap and Attractive Valuation
The evidence of the cheap valuation lies within the price-to-earnings (P/E) ratio. This ratio is used to determine the trading multiple of a stock’s earnings. The ratio takes the current stock price and divides it by the annual earnings of the company. When the outcome is a low P/E ratio compared its industry peer average, it means that the stock is trading at a discount.
Presently, GM stock has a P/E ratio of 5.5 times, about half of the industry average ratio, which is currently 10.2 times. To simplify things further, if shares of GM stock were purchased, they would be acquired for $5.50 versus paying $10.20 for the industry average for every dollar of earnings. I believe the markets are simply ignoring the great value and potential of GM stock.
Just to make a comparison to a very similar company, Ford Motor Company (NYSE:F) is currently trading at a P/E ratio of 11.5 times. Also, the margins reported by Ford are lower than GM stock. Also, GM is labelled as being a growth company whereas Ford is not. This is due to the return of equity for GM stock being greater than 15%, which defines it as a growth company. Now of course patience is required as an investor in GM stock since nothing happens overnight. GM stock is trading at a valuation discount compared to its industry peers and there is also a dividend paid out.
Get Paid to Wait
GM stock is offering a dividend yield of 4.29%, which is based on the trading price of $35.26. This would put GM stock into the category of being a high-dividend stock for two reasons. The first is the fact that GM stock is yielding more than a full percent higher than its industry group in the automotive sector. Also, GM stock is offering a dividend yield that is 2.24 times larger than the S&P 500 index. This index is based on the 500 largest companies that trade on major U.S. stock markets, which traders closely watch from all over the world.
To make things even more impressive, GM stock is known as a dividend growth stock. This means that as time passes, there is a higher dividend that is paid to investors. Since 2015, the total dividend growth rate is 26%; which would be in the double digits annually.
Again, with patience in the stock, a higher dividend per share would be received. The positive result of this is that a higher personal dividend yield would be calculated based on the average purchase price. This trend is highly possible in the future because of the strong financial discipline of the management team. Currently, only about $0.26 from every dollar of earnings is given to shareholders as a dividend payment.
In addition, GM is a serious repurchaser of its own shares. Currently, there is a $5.0-billion share repurchase program in place. This results in a tax-efficient return for investors. The benefit of this strategy benefits investors over a long period of time.
For instance, Buffett owns a little more than three percent of the company, and as more shares get repurchased, Buffett’s ownership increases. Therefore, if you owned GM stock in your investment portfolio, the result would be the same outcome, which is owning more of the company. This would occur regardless of whether a dividend is paid or of the performance of the stock price. (Source: “Stock Repurchase Program,” General Motors Company, last accessed August 4, 2017.)
Final Thoughts About GM Stock
Buffett has many successful years of experience behind him and is one investor that looks at opportunities before many investors start taking them seriously. I wouldn’t ignore the bullish stance that Buffett has.
There is still a lot to look forward to with GM stock, so this could be an investment opportunity to pick up some shares of General Motors stock before the market realizes all this.
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