On 8/26 I purchased 100 shares of GM at $31.54 for a total price of $3,162.62. I also bought 200 shares of F at $12.35 for a total price of $2,479.93.
Honestly, I couldn’t decide which was the better deal between GM and F, so I decided to split the difference. Looking at just the numbers – GM seems to be a more efficient operator on the basis that its profit margin in North America is nearly a full percentage point higher than Ford. However, despite being somewhat nebulous at this point I am excited about some of the news Ford has put out recently around targeting a fully autonomous vehicle by 2021. I am currently building my portfolio around this meaningful trend, and placing bets on all the different players that have a chance to win in this space.
While fully aware of the risks of adding a capital-intensive, cyclical automaker with meaningful financial leverage so late into the economic recovery and in light of global risks, the valuation of these companies is too compelling to pass up.
GM is leaner now than it was pre-bankruptcy, and while it retains financial risk with GM Financial and holds an underfunded US pension plan of ~$10.4 billion, the company is on track yet again for another solid year of auto operating cash flow generation and free cash flow generation. Whether applying a GAAP or non-GAAP approach, GM is trading at an incredibly attractive forward P/E ratio; after raising its full year adjusted-diluted earnings per share guidance to $5.50-$6.00, the firm is now trading at 5+ times full year 2016 earnings per share guidance. The intrinsic value of the shares are around $43 each, though upside to this fair value estimate is a very real possibility. The kicker is GM’s near-5% dividend yield, which remains easily covered by the company’s GAAP annualized free cash flow. Average free cash flow generation during the past three years (2013-2015) of ~$4 billion is far in excess of GM’s yearly run-rate cash dividend obligations of ~$2.24 billion (or 2015’s mark).
GM certainly has a checkered past, of course, and while it’s not possible to state that the current level of dividend payments are completely safe over the long term due to its cyclical and capital-intensive business model, which magnifies pain during economic downturns, there aren’t any immediate threats to the payout in the near term (its second quarter was solid). In fact, its financials look surprisingly good.
At a $0.38 quarterly payout GM will add $152 to my forward income. At a $0.15 quarterly payout, F will add $120 to my forward income, combined for a total of $272 dividend income.
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