Image: Ford Motor.
It's always frustrating when companies see their stock prices go in the opposite direction of their fundamental business strength. Over the past year, that's what investors have had to deal with in the auto industry, as both Ford Motor (F 0.69%) and General Motors (GM 1.20%) have lost a lot of ground in their respective share prices even as they both posted record earnings for the year. Going forward, though, some shareholders are hopeful that the two stocks will bounce back, and they want to know whether one has an advantage over the other. Let's look more closely at how Ford and GM match up right now on some key metrics to see which could be the better buy.
Performance and valuation
Both Ford and General Motors have seen their stocks fall since April 2015, and the declines have been almost identical. Ford is down almost 17% over the past year, compared to 16% for GM.
Another thing that both stocks have in common is that their earnings multiples are extremely depressed right now. That situation typically reflects expectations for falling earnings in the future, and given that both companies posted record results last year, that pessimistic attitude isn't particularly surprising. Based on trailing earnings, Ford shares fetch an earnings multiple of 7, compared to a reading of 5 for General Motors.
What's a little surprising, though, is that investors aren't forecasting an immediate plunge in earnings. In fact, when you use forward earnings estimates, Ford's multiple comes down slightly to 6, while GM remains at 5. Both stocks have very attractive valuations, and GM wins in a photo-finish with a slightly cheaper figure.
Return of capital
Many investors also focus on how a company returns capital to shareholders, and both Ford and GM have been generous with their investors. On the dividend front, General Motors has a 5.1% dividend yield based on its recently increased quarterly payout in March. Ford's regular dividend yield of 4.7% is lower, and it chose not to make a dividend increase in its most recent quarterly payout. However, Ford has instead moved to a supplemental dividend structure, and that resulted in shareholders getting an extra $0.25 per share in January. Going forward, Ford intends to pay enough in a supplemental dividend to bring total payouts to between 40% and 50% of prior-year earnings.
Both companies have also used stock buybacks to enhance shareholder value, but General Motors has turned to them more extensively. GM spent more than $3.5 billion on buybacks in 2015, continuing its trend of slowly ramping up repurchase activity. Ford dramatically slowed its spending on buybacks last year, spending just $129 million. On the whole, both companies have done a good job of returning capital, taking slightly different paths to get there.
Future prospects
As you saw above, one of the key concerns about both Ford and General Motors is whether they'll be able to sustain their current level of earnings. In 2015, GM boasted record calendar-year earnings of $5.91 per share, which makes the stock's current share price of around $30 seem ludicrous. The company did note that special items added $0.89 per share to its earnings figure, including reversals of past valuation decreases of the company's deferred tax assets. Yet taking those into account, General Motors expects to earn $5.25 to $5.75 per share in 2016, and CFO Chuck Stevens noted that those gains will be "driven by a significant vehicle launch cadence, continued emphasis on growing our adjacent businesses, and an unrelenting focus on driving efficiencies into our core operations."
Ford's gains were arguably even more impressive, because the $1.84 per share in earnings that the automaker posted was actually $0.09 less than its adjusted figures were after accounting for special items. Again, with the stock trading below $13 per share, Ford's earnings were similarly impressive to GM's, and the company emphasized its international success. The Asia-Pacific region had its best-ever annual profit, and the long-struggling European segment returned to profitability. Strong sales in Europe and South America helped boost Ford's worldwide market share by two-tenths of a percentage point to 7.3%. Moreover, Ford projected that earnings per share will be equal to or higher than 2015 figures, along with overall revenue and operating margins for the automotive segment.
It's tough to pick between Ford and GM based on these measures, because they both look strong. I'd give a slight nod to Ford because of its ability to move forward after some hiccups related to the rollout of the new aluminum-body F-150 in 2015, but General Motors would also be a reasonable choice for investors.
