The auto industry has done exceedingly well recently, with U.S. auto sales coming in at new records in 2015 and remaining strong so far this year as well. Yet the automaker stocks haven't performed nearly as well, and both Toyota Motor (NYSE:TM) and Ford Motor (NYSE:F) have suffered extensive declines that stand in stark contrast to their sales figures. Now, the threat of a global economic crisis has many investors thinking that both Toyota and Ford could remain under pressure for some time. Yet some see the stocks as value plays and want to know which one they should pick. Let's take a look at how Toyota Motor and Ford Motor compare on some key metrics to see which deserves your attention right now.
Stock performance and valuation
Both Toyota Motor and Ford Motor have given their shareholders extensive losses over the past year. Toyota has seen the steeper drop with a nearly 25% loss in its stock, but Ford's 12% decline hasn't made its investors happy either.
In many situations, stocks that fall more become more attractive from a valuation standpoint than those of competitors that don't fall as much. However, the auto industry has investors extremely wary about its ability to sustain current earnings levels. As a result, valuations are extremely inexpensive. Toyota shares currently trade at a trailing earnings multiple of just seven, far less than the stock market's overall price-to-earnings ratio right now. Yet Ford is even less expensive, trading at just six times trailing earnings.
When you incorporate projections about future earnings into the mix, Ford keeps its edge. The U.S. automaker trades at less than six times forward earnings, compared to eight times forward earnings for Toyota. Neither stock is expensive, but Ford retains a slightly more attractive valuation.
From a dividend standpoint, both Ford and Toyota treat shareholders fairly well. Toyota declares a dividend annually, breaking it into two unequal pieces. For the current year, Toyota expects to distribute a 210 yen per share dividend, and when you consider that each American depositary receipt for Toyota stock represents two shares, that amounts to roughly a $4 per share annual payout on ADRs with a share price of about $100. That works out to a yield of 4%. Meanwhile, Ford treats shareholders even better, with a regular dividend yield of 4.8% that doesn't even include the special dividend payout of $0.25 per share that it made earlier this year.
Both companies have raised their dividends extensively in the recent past. Ford just started paying its dividend again four years ago, but it has tripled its regular quarterly payout since then. Toyota's dividend has quadrupled in yen terms since 2012. Yet both companies have plenty of capacity to boost payouts further based on their current earnings levels. With its higher yield, Ford beats Toyota, but both are solid income stocks.
Given their valuations, what most people fear about Ford and Toyota is whether they can avoid seeing their earnings shrink. Toyota's forward earnings estimates already assume a decline in annual earnings for the 2017 fiscal year, and expectations for Ford are flat at best.
Yet Ford has remained optimistic about its prospects. Low gasoline prices have helped its key F-series pickup truck lineup, and that's where Ford makes a huge portion of its overall profit. The cyclical nature of the business leaves Ford vulnerable to potential downturns, and the possibility of long-term fallout from the Brexit vote in the U.K. could hurt the company's efforts to restore its European operations to a more successful track. However, the U.S. economy has remained strong, and expectations are that Ford should be able to have another stellar year in 2016 that produces at least as much profit as 2015 did.
Toyota Motor has somewhat larger concerns ahead of it. An explosion at a factory of its key brake-component supplier was just the latest in a series of problems that forced Toyota to idle its assembly lines temporarily, and that will increase labor expenses by forcing the automaker to pay overtime in order to catch up with production goals. At the same time, sales figures for May were especially weak, falling nearly 10% as luxury Lexus sales took a particularly large hit. Toyota's truck line isn't as strong as Ford's, and so the recent shift has had a bigger impact on Toyota's U.S. growth prospects. Moreover, a yen gaining strength against the euro and British pound could hurt Toyota's exports to Europe at a particularly critical time.
Between these two automakers, Ford looks like the better buy right now. With higher dividends, cheaper valuations, and more predictable growth prospects, Ford tops Toyota and offers a compelling value proposition to those willing to take on the risk of a cyclical stock under current conditions.
Dan Caplinger owns shares of Ford. The Motley Fool owns shares of and recommends Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.