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I made several predictions about 2014 (I, II) earlier in the year. One of them was that General Motors (NYSE:GM) would hit $50 a share. One of the key reasons for my optimism I stated in the article was articulated as, "Another positive development the removal of the government as a shareholder should have for stockholders is that it should improve its capital allocation options. These would include initiating a dividend and buying back stock."

Well, that did not take long. After the market closed on Tuesday, GM announced it would institute its first dividend since the financial crisis. It is not a trivial payout either. At its current stock price, the dividend level would be 3%. This is close to the dividend yields currently available in more traditional dividend paying sectors like Utilities.

I expect a rash of upgrades and/or price target upward revisions by analysts in coming weeks to incorporate this new value driver in this still undervalued stock. This is also an important catalyst also for General Motors' stock getting to my $50 price target by year-end if not sooner.

Valuation:

After posting just a 2% gain in FY2013, revenue growth is projected to triple to over 6% in FY2014. The consensus forecast calls for GM to earn ~$4.60 a share in FY2014 as well. This would represent better than a 30% year over year jump in earnings. The stock is too cheap given those growth prospects and now a dividend at just ~8.5x forward earnings.

Robust Demand:

2014 is projected to another solid year for domestic auto production with the country producing a pre-crisis level of 16mm plus vehicles. General Motors is also now producing almost 300K vehicles/month in China through joint ventures. It is growing sales in the low teens and should continue to take market share from Japanese carmakers as tensions rise between Japan & China. GM is even taking market share from domestic Chinese automakers in the Middle Kingdom.

Even Europe is looking better. Auto registrations have risen for three months in a row on the continent and prospects are good for General Motors to continue to shrink losses in its European operations in 2014.

General Motors started out in my value portfolio. With the dividend announcement and its soon to be 3% yield it now also merits inclusion into my income portfolio. Yield investors who like good value with solid growth prospects and are willing to accept a slightly lower yield than other dividend paying sectors, should do the same. BUY

Source: GM: Undervalued And Now A Good Yield Too