Last year was a very good year for General Motors. A very healthy sales environment helped drive the shares more than 40% higher, a rally which enabled the government to divest its remaining stake. Even more promising, the company re-established its dividend payout, signaling the health of its cash flow and its belief that the recent sales trend would continue. Finally, it replaced retiring CEO Dan Akerson with Mary Barra, a promotion from within.  

Unfortunately, as 2014 unfolded, General Motors found itself once again on the defensive, with recalls and lawsuits grabbing the headlines. The stock has given back a part of the 2013 gain, dropping about 15% year-to-date. Does the lower stock price signify a buying opportunity, or does the negative news reflect more of what’s to come for GM?  

Sales are on the rise
It looks like 2014 will be a banner year for automakers, with new-car sales restored to levels not seen since before the Great Recession. Through the first half of 2014, GM sales increased 4.3% compared to last year. Though the monthly numbers in August ticked down slightly, truck sales, GM’s biggest revenue generator and profit margin item, continued to roll. Chevy’s Silverado sales in August were up 12.8%, Tahoe was up 20.5%, and the even bigger Suburban was up over 100% compared to August last year.

Even more promising, GM’s average transaction price has increased an incredible $2,900 from a year ago. The company has become more disciplined in its use of incentives, actually dropping below competitors Ford and Chrysler in their use in the month of February, which belies its reputation as the perennial leader in incentive-based sales. …  

Recalls finally behind them?
While it is naïve to think that all of GM’s recall problems are in the rear-view mirror, we give Mrs. Barra high marks for handling the first major challenge of her tenure as CEO. Reporting the losses now (roughly $2.4 billion from earnings in the first two quarters of the year) saves the impact on future earnings. Furthermore, GM has created a compensation fund to help settle claims caused by the ignition-switch failures, currently estimated to be $400 and $600 million. …  

Potential headwinds
Since 2009, interest rates have remained very low, making auto loans more affordable, a significant driver of the industry’s healthy sales numbers. Should news come out that rates are on the rise, a shift away from interest-rate-sensitive securities would likely be the first reaction. …  

The verdict
These shares boast a very healthy 3.6% dividend yield, with ample potential for future increases given the company’s sustainable free cash flow. Income-oriented investors frustrated with the low yields on bonds have been shifting their focus to high-yielding stocks, and GM offers a growth profile unlike many others in this high-dividend-paying category. …

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