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General Motors dividend could be far down the road

Dear Mr. Berko: I bought 200 shares of General Motors at $33 because they announced a $2 billion profit for their third quarter.

That profit is fantastic and proves GM is a great company. This is an impressive feat, and if auto sales continue strong it could be repeated in 2011.

With GM currently trading at $34, do you think I should purchase another 200 shares? Do you have any idea when GM might pay a dividend? Could the stock go to $100? — D.C., Springfield, Ill.

Dear D.C.: You seem like a real swell guy, albeit a little dupable, and I suspect that you probably still use Brylcreem and Old Spice. Anyhow, GM will not pay a dividend until it repays the Treasury the billions it borrowed. And that may not happen until pigs fly.

However, I think that you should sell your GM because I’m almost stone ginger certain those shares are headed lower. Yep, I read that GM reported a $2 billion profit last quarter. But I’m not comfortable with that titillating number, which was released two weeks prior to its initial public offering.

I just can’t seem to find enough comfort in my gut to trust General Motors. Investors should ask themselves: If the same accounting standards used by Kellogg’s or DuPont were used by GM, would GM have been able to report $2 billion in earnings last quarter?

Sadly, there’s not much difference between a car dealer and a Wall Street banker. Both seem to have serious trust problems, and both would steal the pennies from a dead man’s eyes.

Now, if you believe GM can sell plenty of cars in an economy with l8 percent real unemployment and banks foreclosing on tens of thousands of homes to earn $2 billion again, then I’ve got a sweet toll bridge in Hoboken I want you to see.

There are very knowledgeable economists who believe 2011 is also going to be a difficult year. These guys believe that QE1 was poorly conceived and that QE2 may actually create some damage. And while the economy will recover, they also believe it will be a long, slow slog rather than a brisk response that Washington would prefer. This does not bode well for a recovery in the auto industry.

GM won’t receive any of the proceeds from the common stock sale. The government should receive about $13 billion to recoup a chunk of the bailout cost. This reduces the government’s ownership from 61 percent to around 35 percent, so GM must return to Wall Street a few more times to raise the $30 billion it still owes the Treasury.

And that huge overhang of stock waiting to drop like a second shoe makes me uneasy; it’s potentially very dilutive.

GM also sold 60 million convertible preferred shares at $50 and raised $3 billion. Management will use the proceeds from the preferred sale to fund an egregiously generous, union-designed pension plan and to repay some “funny” loans.

I still see the old GM culture under the new GM skin. I see people doing the same old things the same the old way. And I see efficiencies still being held hostage to abusive union demands. And after Ross Perot quit the GM Board, I recall his comment: “You can remove management and employees from the old culture, but you can’t take the old culture out of management and the employees.”

So it’s the same wine, but in a smaller bottle. GM likes to think it has changed, but you’ll do well to remember the old axiom: “The more things change, the more they stay the same.”

And until proven otherwise, GM will never trade at $100 per share.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com.

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