|
Investing: General Motors is it time to buy?
December 28, 2005 - General Motors, ticker symbol GM has been in the news recently as its stock price has hit a 20 year record low of $19 as of the date of this article. For those of you who are familiar with the 'Dogs of the Dow' theory, a list of the 10 top paying dividend stocks on the Dow Jones Industrial Average, GM ranks #1, paying out a whopping 10.6% or $2 a share dividend per year.
As a Value Investor, when we see a DOW stock leap to the top of the charts, we have to take a closer look. The last stock we found this way was Altria, otherwise known as Philip Morris, ticker symbol MO. Big MO shot to the top of the DOW dividend payers in March of 2003, handing out about 9.5% a year in dividends with a stock price of just under $30. The question is, do we think that GM will do the same?
The first thing I like to look at is a ten year Earnings per Share (EPS) history. Why? Because when we buy a stock, we are going to hold it for a long time, hopefully forever. The great companies that we want to buy will have a solid history of increasing earnings per share, which will reward us with an ever increasing stock price. One of the best examples you can find is a little company named General Electric (GE), their 10 year EPS history looks like this:
Year | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 |
EPS | 0.72 | 0.82 | 0.93 | 1.07 | 1.27 | 1.41 | 1.51 | 1.55 | 1.59 |
We can clearly see that the management at GE has a history of increasing its earnings, it's likely (although not certain) that they will continue increasing earnings in the future. If GE increased its EPS at the same rate for the next ten years, we could come up with a ballpark figure of what one share of stock should be worth ten years from now. This is one of the fundamental ideas behind value investing.
Now that we have a better idea of what we want to see for an earnings history, lets look at GM:
Year | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 |
EPS | 6.07 | 8.70 | 4.18 | 8.53 | 6.68 | 1.77 | 3.35 | 5.03 | 4.95 |
At General Motors, we can see that the EPS over the past 10 years has been decreasing. If they continue along this path, the future does not seem very bright for GM. Does this mean that the stock won't go up or that the company won't survive? No, but it does seem to indicate that they need to undertake some big changes in the way they are running the company. Stock traders and Wall Street could interpret those changes positively or negatively. Make sure you have all the facts - do you want to gamble or invest? Value Investors don't really need to dig down much further, this looks like one to sit out.
Source: www.WhoFish.org
|
|
|
|
|
|
