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MARKET BEAT

That GM Stock You Bought in '65 Is About to Pay Off

December 10, 1993|TOM PETRUNO

Congratulations, of sorts, are in order for longtime General Motors shareholders: After 28 years, they're about to break even. GM stock finished at $56 on Thursday, the best close since the stock hit its all-time high of $56.375 on Oct. 26, 1965. With the momentum in the stock of late--it was $42 in October--a new high seems a foregone conclusion any day now.

There are two noteworthy aspects to GM's resurgence. First, it's testimony to the U.S. economy's strength and to the renaissance of American heavy industry, after decades of playing catch-up to foreign rivals (especially Japan).

The sobering side to the GM story is that an investor who bought the stock in 1965 has had to wait nearly three decades for a capital gain.

Today, with the market overall near record highs, the GM experience is a warning to those who believe that all they need to make money in securities is time--that if you just take a 10-year or 20-year view, it's impossible to lose with stocks.

To be fair, GM holders have been paid something to wait: Most years, they've earned a dividend of between $1 and $3.40 a share. In the mid-'80s, they also were given separate shares in GM Hughes Electronics and GM Electronic Data Systems.

Even so, buyers who paid $56 for GM stock in 1965 would probably have mocked anyone who would have suggested back then that shares of the world's largest industrial firm would be a dud for 28 years. In contrast, if you'd bought Ford stock in 1965, you'd be up 484% today; the average blue-chip stock, as measured by the Standard & Poor's 500 index, is up 402% in price since then.

GM's long slide into mediocrity doesn't need much rehash here, because most people know the story: American car companies built a generally lousy product in the '60s and '70s. The Japanese arrived with their better-quality cars during the mid-'70s oil crisis and began taking market share. The Big Three were slow to join the low-cost, high-quality movement. The result was that, by 1980, Ford and Chrysler both were near collapse.

The irony, says veteran investor Bradlee Perry at the Babson Group investment company in Boston, is that GM "was by far the strongest company when the Japanese were eating the Big Three's lunch. They didn't have to take the drastic action that Ford and Chrysler did to survive."

In retrospect, by putting off the hard decisions needed to make itself competitive again, GM merely prolonged its shareholders' agony.

Today, Wall Street believes GM is finally on track. Helped by its own deep cost cutting, by Americans' surprising appetite for new cars and trucks and by Japan's economic disarray, GM should earn $1.99 a share this year, after three years of losses. For 1994, Wall Street's consensus estimate is $4.69 a share.

Ronald Glantz, analyst at Dean Witter Reynolds, thinks GM could earn as much as $11 a share in 1996 if the domestic auto and truck sales boom continues and if an economic recovery begins in Europe, where GM is particularly strong.

Even so, Glantz doesn't believe GM stock is worth much more than the current price. Reason: Saddled with $24 billion in unfunded pension obligations to workers, GM will find it virtually impossible to raise its cash dividend from the current annual 80 cents a share (a yield of just 1.4% at the current stock price), Glantz says. For years to come, added GM profit will have to go to pay off retirees instead of going to shareholders or to pay for investment in new technology.

Neither Ford nor Chrysler faces that problem. Because dividends are what ultimately matters to investors in mature companies, Glantz says, GM stock's potential is limited. Stephen Girsky, analyst at Paine Webber, agrees. He says Ford should sell in the mid-$80s in '94 or '95 but that GM could as easily drop $15 a share as rise $15 from here.

For most investors, the more important story here is the lesson of GM's long road back since '65. It's in vogue to assume you just can't lose with stocks if you have 10 years or more to play with. Probably that's true for a diversified portfolio.

But the GM experience is a good excuse for a reality check. If you aren't well diversified in stocks, or you're tempted to make a huge bet at today's high prices, remember that even 30 years may not be enough time to right a wrong move.

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