Four weeks ago, I argued in this column that high-flyers Facebook (FB) and Amazon (AMZN) were my two favorite stocks despite their high price (P/E ratios) and that they don’t pay dividends. Fortunately, their prices have increased nicely since then.
Today I’d like to recommend two beaten-down cheap stocks yielding hefty dividends that, of course, are tax free to anyone in the 15 percent tax bracket or below — couples with taxable income (after all deductions) less than $75,301 and singles under $36,651.
My favorite dividend stock is GM, the world’s largest car company, selling at only four times earnings (more than 75 percent below the market average of 18) and paying a terrific 4.9 percent dividend. Its talented CEO and Board Chairperson is Mary Barra — the number one female business leader — according to Fortune Magazine, for the second year in a row.
GM’s $9.7 billion profit last year was an all-time record and this year’s profit for 2016’s first six months is $4.85 billion, certainly a good indicator that GM will top $9 billion again this year. Yet car-company stocks, like airlines, typically sell at very-low P/E multiples (Ford has a P/E slightly less than 6) given the cyclical nature of their businesses.
Last year’s new U.S. vehicle sales of 17.5 million set all-time records. This year’s overall forecast, as new sales slow, is for slightly less, even though sales are up 1 percent over 2015’s first 8 months through August. Investors also worry that the average new-car loan is now a lengthy 68 months; although defaults remain low, they are edging higher.
Overseas, GM dominates the large-car market in China where it sells three times as many Buicks as it does here. Its Cadillac sales in China were up 93 percent year-over-year in August! (Worldwide Cadillac sales have grown 24 percent since August 2015.) GM is spending an estimated $14 billion from 2014 — 2018 to build five factories in China.
Mary Barra is respected for how well she handled the GM ignition-death tragedy and her willingness to make tough decisions. She shut down GM factories this year in Russia and invested $581 million in Cruise Automation (driverless cars) after taking a $500 million stake in ride-share Lyft last year. She is the only former plant manager to become CEO at GM.
GM cars and trucks are competitive, now scoring well in dependability ratings. Chevrolet recently had four models, the most of any car brand, receiving J.D. Powers top rating. Its electric Chevrolet Bolt just announced this month that it gets 238 miles per charge, better than highly-rated Tesla. One analyst even claims GM’s “product quality rivals Toyota.”
Despite all the good profit news — GM has beaten profit estimates by more than 15 percent five quarters in a row — at about $31 a share GM is down 9 percent this year. (Auto companies are getting no respect on Wall Street: Ford is off 14 percent and Daimler has lost 19 percent so far this year.)
Yet Warren Buffet’s Berkshire Hathaway owns 40 million shares of GM, and it is the only auto company on a Goldman-Sachs’ list of 50 top stocks owned by hedge funds, ranking No. 18. S&P Capital (5 of 5). Thomson Reuters (10 of 10) and Market Edge (long) all give it their very highest ratings!
One Wall Street expert argues: “GM is solidly profitable with strong financials and a good credit rating, but it is also still a turnaround story that could grow profits significantly over the next 5 to 7 years.” If GM can significantly grow its annual $9 billion profit, I think its share price should double in 3 to 4 years.
Why would I recommend, as my second dividend-stock choice, an old-fashioned tech stock that, unlike fast-growing Amazon and Facebook, has seen its sales revenue decline for 17 quarters in a row? IBM reached its all-time high of $215 early in 2013 before plunging almost 50 percent to $117 February 11. (It has climbed back to the mid $150s and is now up 12 percent so far this year.)
The first reason to recommend IBM is because of its willingness to return money to shareholders. It pays a solid, and I would argue, very safe 3.6 percent dividend. It also has spent nearly $140 billion to buy back its shares since 2004 — a somewhat controversial use of cash that critics argue could have been better used to grow its business. Another reason to like IBM is that it is a bargain-priced tech stock, selling at only 12.5 times earnings, 30 percent cheaper than the market’s 18 P/E average.
The problem for IBM is that it has been forced to transition from old-line legacy businesses (particularly hardware) to newer more profitable opportunities — cloud computing, business analytics, mobile and security. And, of course, it needed to expand its use of its super-star artificially-intelligent “Watson.”
CEO Gina Rometty (ranked No. 4 by Fortune on its list of top female business leaders) has spent $9 billion on 25 acquisitions in the last 18 months to help grow what IBM calls “strategic imperatives” that are its newer growth initiatives. They provided 35 percent of IBM’s profits so far this year compared with only 10 percent in 2010.
Two high-profile acquisitions by IBM this year have been Health Analytics and Merge Healthcare that make Watson’s use by doctors to diagnose ailments and recommend treatments faster and better than ever.
Watson’s incredible super-computing ability is also being used to forecast weather more accurately. IBM bought the Weather Company (owner of the Weather Channel) last year and just launched “Deep Thunder” June 15 that is advertised as “the world’s most advanced hyper-local weather forecasting model for business.”
Unlike GM that is one of Sue and my top 10 investments, IBM is one of our smaller holdings. However, it would certainly be one of our largest if we were income investors. I believe IBM’s nearly 4 percent payout, long-range growth potential and status as solid blue-chip tech stock make it an attractive investment.