This Stock is a Buy Today

It’s been a bad week for Volkswagen (OTC: VLKAY) CEO Martin Winterkorn. This time last week, Winterkorn was gainfully, and likely contentedly, employed at the German auto giant he headed. Today, Winterkorn is unemployed, having resigned his post in haste and with some

Volkswagen shareholders can feel Winterkorn’s pain, though they hardly empathize with it. Last week, they owned shares (ADRs, to be specific) that were changing hands for around $37 each. Today, these same shares trade around $27. Some $22 billion in equity market cap has been obliterated.

[ad#Google Adsense 336×280-IA]Volkswagen blew it, and in a stupid way: Company operatives manipulated the software on several diesel-powered models to show reduced nitrogen oxide emissions when tested in a lab.

The deception was soon revealed. CARB (California Resources Board) was one of the first to blow the whistle.

(Why regulators failed to pick up the discrepancy in the test lab is another matter.)

Volkswagen’s actions were stupid, but less nefarious than they appear.

Internal combustion engines are incredibly clean, while EPA and CARB diktats are incredibly stringent. We are dealing with a percentage of less than 1% of an engine’s exhaust. No one was in danger of being choked out.

At the same time, Volkswagen’s engines likely ran better than they would have if Volkswagen (and the other automakers) wasn’t forced to adhere to ridiculously low emissions standards. (Keep in mind, too, that diesel engines get 10 to 15 miles more per gallon than comparable gasoline-powered engines.)

Anyway, the damage has been done, and now the make-work for lawyers, the payoffs to consumer-watch groups and the lining of government agency pockets begins. Volkswagen has set aside $7.3 billion in an initial estimate of fines and costs it will need to make it all go away.

The final tab to Volkswagen will likely climb, but whatever it is, it won’t cripple the company. Volkswagen is simply too big to fail: The company generates $250 billion in annual revenue and employs nearly 600,000 people worldwide. Volkswagen is larger in market cap and generates more annual revenue than either Ford (NYSE: F) or General Motors (NYSE: GM).

So, the answer is “yes,” Volkswagen’s 4% dividend yield is worth the risk. Thanks to the recent sell-off, Volkswagen shares trade where they traded in late 2011. In addition, they trade at half of where they traded as recently as this past March.

The Volkswagen dividend, paid annually in June, has always been covered by earnings. Over the trailing 12 months, Volkswagen paid $1.10 per share in dividends. Earnings were $5.10 per share.

Of course, the costs associated with fines, litigation, recalls and reputation rehabilitation will weigh on earnings in the near term. Much of these costs, though, will be mitigated by liability insurance and time – money will be doled out in discrete increments, not in a lump sum.

Time will help Volkswagen in other ways. Time erodes memories, and memories are short. Do you remember GM’s ignition-switch fiasco last year? I didn’t think so. GM shares subsequently rallied, though the company had to pay $2 billion to make it all go away.

GM was a buy in 2014; Volkswagen is a buy today. In six months no one will have a clue that nitrogen oxide is emitted from internal combustion engines. That’s good news for new Volkswagen shareholders.

— Steve Mauzy


Source: Wyatt Investment Research