A recent Barron's had a cover story featuring General Motors (NYSE: GM) which I have been pondering for a while. Somehow the story did not get me all that excited despite the boldness of the headline reading "BUY GM."
More attuned to the words that followed -- "GM is a risky bet" -- I wondered why they would not feature something with possibly equal potential and far less risk. If you read the journal cover to cover, you might have taken note of the fact that there were two articles highlighting General Electric (NYSE: GE).
In the first, Michael Santoli extols the virtues of owning GE compared to a 10 year Treasury note which offers security but no upside potential. He mentions the high yield, low P/E, strong businesses and the fact that current CEO Jeffrey Immelt bought shares in the open market for $3.5 million.
Later in the same issue, Tom Sullivan writes that GE is a good bet, but he does include a few caveats. In particular, some concern that Immelt might chase higher riskier returns in an effort to boost share price which has been languishing for many years.
GE has less competition for its products primarily focused on water, power and finance. The last is the biggest question mark, creating some fear in the near term to the over all credit market and the unknowns. At the same time it offers a 4.5% yield compared to none a dividend & yield:1.00 (7.70%) for GM, and then there is the seldom discussed fact that GE is a triple-A rated company, which are few and far between these days.
General Motors closed yesterday at $13.19 near its 52 week low of $12.63. Barron's likes the fact that GM has reduced its labor, health care and pension fund costs under recently negotiated new agreements and that foreign sales are growing at the same time. On the other hand, the cost of plastics (made from oil), steel and aluminum, to name just a few commodities, are going up. Transportation costs are also going up, and new foreign auto makers in India, China and Korea are joining the Japanese competition.
GE closed yesterday at $27.59, also near its 52 week low of $27.20. There is no question that with GM's greater risk might come greater reward, however, there are too many "ifs" for me. All the "if this" and "if that" in the articles I read does not make me comfortable. I view that as an equation where prognosticators are trying to come up with an answer having one known and multiple unknown factors that will affect the outcome.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of GE.
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Reader Comments (Page 1 of 1)
6-25-2008 @ 3:44PM
Bruce E Warnock said...
The last time I looked at the Ford 10-Q they had a deficit net worth, over $70+billion of debt and almost all assets pledged to lenders. Today we read GM will have to borrow up to $8 billion and pledge their assets also. Neither company has much to offer to investors.
Now comes GE, languishing under the lack-luster reign of Jeff Immelt. Under his leadership, the stock has declined from $60 in the year 2000 to $28. He has long outlived his welcome and the Board should put new leadership at the top. GE is a great company only lacking creative and innovative leadership and that can easily be fixed. While they are at it, the Board should separate the positions of CEO and Chairman of the Board.
I have my chips in the GE camp.
6-25-2008 @ 3:46PM
peter blum said...
"... At the same time it offers a 4.5% yield compared to none for GM, and then there is the seldom discussed fact that GE is a triple-A rated company, which are few and far between these days."
You obviously don't own or care to own GM stock, or you would know that GM currently pays a dividend of $.25/quarter, which is a 7% plus yield at its current price range. Of course, if you have any inside information regarding GM's future dividend payouts, please share it with your devoted readers.
6-25-2008 @ 3:52PM
Sheldon L said...
Peter,
Thank you for pointing out my error. As you state the Div & Yield:1.00 (7.70%) which I found on another financial site. The AOL site did not indicate the dividend. It has been corrected.
My apologies to my readers for not double and triple checking.
6-26-2008 @ 3:38AM
Jim said...
I think GM is going to survive, every man wants a Corvette. Cutting the dividend could and would kill the interest in the stock. I don't this will happen because too many pension and mutual funds own this stock. This is a short term bottom, just as the dollar and the country go down it will rebound as soon as our currency issues get resolved.