There have been some pretty negative news surrounding the big three US auto manufacturers this year. Recently GM and Ford reported continuing large losses, triggered by a decrease in the demand for cars nationwide. The demand for cars, which typically is highly cyclical in nature, is lower because of the low consumer confidence in the economy as well as the difficulty that car buyers have in obtaining credit financing to purchase new vehicles.

As a result of these events Detroit manufacturers’ stock prices have taken a large hit this year with GM losing 82% in 2008 while Ford stock lost only 70% during the same period of time. GM eliminated its dividend payment in July 2008 in order to boost its liquidity. The company has taken other measures to bolster its cash situation by selling off assets. Ford eliminated its dividend payments back in 2006. These two stocks should have been out of any dividend portfolio after the cuts, as every dividend investor knows that dividend cutters and eliminators have underperformed the stock market over the past 30 years on average.

The future of the US car companies is definitely getting bleaker every day. The executives of GM, Ford and Chrysler are in talks to get money from the US government in order to keep the industry afloat until the current downturn ends. This could be the only thing that could save several million jobs in the auto industry, since selling off assets might be difficult to achieve in the current tough credit environment.

With GM and Ford stocks trading at multi-decade lows, it seems that investors could potentially make large gains once GM and F overcome the crisis and return to profitability. I see three scenarios for the future of car companies:

1. Car companies receive a loan guarantee from the US government, similar to the one received by Chrysler in the early 1980s. Millions of jobs will be saved; new energy and cost efficient models will be unveiled and after the economy recovers the auto manufacturers will make advance loan repayments and start paying out distributions to their shareholders. Furthermore, as long as the stock base isn’t diluted, long term investors could easily see large capital gains from current levels. Back in the late 1970’s Chrysler stock was trading at under $2 a share before the government loan guarantees. After the company turned around, the stock traded as high as $50 before the 1987 crash. No dividends paid for several years after the bailout. If this scenario were to occur owning stock would be a very good strategy.