When The Goodyear Tire & Rubber Company (GT) was mentioned in the Goldman Sachs "40 Cheapest Stocks Report" last year, it caught my attention. After delving into Goodyears numbers, it becomes obvious why Goldman Sachs had it in their report. Lets explain why..
Firstly I looked at the the PE ratio. At the moment Goodyear has a PE ratio of 11.77 compared to 19.65 on the S&P500. Smart Investors who continue to be long equities look for equities with cheap valuations in order to minimise risk in the event of a market crash. Another way to value a stock is to research the price to sales ratio. The price to sales ratio illustrates how much you are paying for every dollar of sales the company generates. Some analysts prefer this ratio ratther than the PE ratio as turnover figures are usally harder to manipulate compared to earnings figures. At the time of writing, Goodyears price to sales ratio is 0.38. This is cheap and literally means that the shareholder gets a dollar worth of revenue for only $0.38. On the contrary the S&P price to sales ratio is 1.76 - more than 4 times more expensive on a price to sales ratio.
Their press release last year (September 20th 2013) changed things in my eyes. They definitely commited to their shareholders as they resinstated a dividend that they hadnt paid since 2002. When you see a company re-issuing a dividend after more than a decade, it attracts attention. To reinstate a dividend afetr so long, the company must feel financially sound. It would be a disastrous move to reinstate a dividend only to terminate it a few years later. The management definitely looked at the numbers and felt very confident in re-issuing the dividend. The company started out paying $0.2 per share but they have increased the dividend to an anual adjusted $0.24 per share which equates now to a 1% annual yield.
In the same press release, the company also announced a stock buyback programme valued at $100 million. "Buybacks" are fantastic for shareholders as when companies buy their own shares, it reduces the amount of shares overall which make existing holdings more valuable.
Recommendation : Long The Goodyear Tire & Rubber Company (NASDAQ:GT)