General Motors Company: Can GM Stock Reward Shareholders?
January 4, 2017
Upside for GM Stock?
Over the past five years, General Motors Company (NYSE:GM) stock has been stuck in a trading range. As such, the question investors are asking is, “Is the market missing something, or is GM stock not a compelling investment?” To determine this, all aspects of the company must be considered.
An investment should always be compared to the overall index and to its peers in order to understand if the investment would be worth your time. A key metric for this is the price-to-earnings (P/E) ratio.
Besides for comparison, this ratio also comes in handy for understanding how much is being paid for the earnings of the company or a index. In the case of GM stock, the P/E ratio is 4.1 times, which is much cheaper than the S&P 500 index, which has a ratio of 26.02 times.
When comparing GM to its peers in auto manufacturing industry, it has a P/E ratio of 33.5 times. Therefore, GM stock is trading at a discount when compared to the index and the peer group.
Growth Drivers
GM’s management is working hard to increase the top and bottom line, according to the company’s third-quarter earnings that were released in October. Net revenue saw growth of 10.3% and net income more than doubled compared to the same quarter the previous year.
To maintain or increase numbers like those seen the third quarter, GM is turning to China. Growth from the country is exceeding the rest of the markets around the world, with 2.9-million vehicles delivered to China in the third quarter. GM believes that Chinese sales will increase by 5.0-million units, a goal that is expected to be achieved by 2020. GM has also committed $5.0 billion towards investment in China. (Source: “General Motors Announces Growth Strategy for China,” General Motors Company, March 21, 2016.)
The U.S., GM’s home market, has also been seeing positive growth following years of it being flat or negative. Trucks have had the most growth so far, having larger margins when compared to smaller compact cars. When overall sales increase, it also means the financial division sees growth as well.
Final Thoughts on GM Stock
GM stock pays a dividend, which means more money in investors’ pockets. The current dividend, paid annually, is for $1.52, which represents a payout ratio of 16.7%. This ratio means a chance to increase the dividend payment exists. History says the same, based on the history of the payout. GM stock is currently trading at $35.06, which is offering a yield of 4.34%.
Shareholders have also gotten money back by way of a share repurchase program for $9.0 billion worth of shares. This is expected to be completed by the end of this year. With a low payout ratio, it is possible for a new buyback program to follow the completion of the current one. (Source: “Stock Repurchase Program,” General Motors Company, December 15, 2016.)
GM stock is not a one-quarter story, but one likely to last for many years to come. Business growth could lead to possible stock price appreciation. This will help GM stock be more in line with the valuation with the index and their peers.
