Better Buy: General Motors Company vs. Toyota

Image source: General Motors.

Investors have been frustrated with automakers recently. Even though the industry posted record sales in 2015 and is on track to do extremely well in 2016, too, stocks of companies like General Motors and Toyota Motor haven't delivered the performance that shareholders would want to see. For those who've held off on buying until now, however, both of these stocks look like they might be great bargains for value-seeking investors. Smart stock-pickers want to know which stock is the better buy right now. Let's take a look at how General Motors and Toyota compare on some key metrics to see which deserves your attention right now.

Stock performance and valuation

Both General Motors and Toyota have lost a lot of ground over the past year. GM is down 11% since June 2015, and Toyota has dropped even more extensively, falling 24% over the same time frame.

Yet even though Toyota has fallen more than General Motors, GM still suffers from a perception that it is less financially stable than its peers, and investors have therefore given it a cheaper valuation than Toyota and many other automakers. Looking at trailing earnings, General Motors stock trades at an earnings multiple of just over 4, which is extraordinarily low even for a major player in a notoriously cyclical industry. By contrast, Toyota shares are also cheap, but its trailing price-to-earnings ratio is above 7.

Some of the issue has to do with expectations that earnings for automakers have peaked and that future profits will likely fall from their cyclical highs. Yet even when you use future earnings estimates, GM's valuation advantage persists. The U.S. automaker's forward earnings multiple is just under 5, but Toyota trades at more than 9 times forward estimates. By these simple measures, both stocks are good values, but General Motors is almost ridiculously cheap.

Dividends

Investors seeking income have gotten a lot of what they want from both General Motors and Toyota. GM currently has a dividend yield of 5.4%, making regular quarterly payments like most U.S. stocks.

Image source: Toyota.

Toyota follows the international model of declaring semiannual dividends, with a smaller interim distribution coming in September and a larger year-end distribution in at the end of its fiscal year in March. For the 2016 fiscal year, Toyota paid 100 yen per share in September 2015 and 110 yen per share in March 2016. According to its annual report, those payments amounted to $1.80 after translating into U.S. dollars, and because the Toyota securities that trade on U.S. markets represent two common shares, dividend investors got $3.60 per American depositary receipt. That works out to a yield of about 3.6% at current prices.

In terms of dividend history, Toyota has a more reliable track record. The Japanese auto giant has consistently paid dividends for years, and its payout has risen four-fold in local currency terms in the past four years. By contrast, General Motors just started paying a dividend again back in 2014, after a hiatus following its bankruptcy filing following the financial crisis. Even with GM having made a couple of increases to its dividend since then, some dividend investors will prefer Toyota's stability despite its lower yield.

Growth prospects

Both Toyota and GM face threats to future growth. Given the cyclical nature of the auto business, few expect the two companies to sustain profits at this level, and the challenge they both face is doing their best to retain as much of their current earning capacity as possible.

For Toyota, the thorn in investors' side has come from production difficulties. Just this week, Toyota has said that it would have to recall 2.87 million cars because of potential faults in their emission control units, and a separate announcement pointed to 1.43 million cars suffering from possible airbag inflation issues. Some vehicles have both problems, and so a total of 3.37 million vehicles are subject to at least one of the latest recalls.

In order to bolster growth, Toyota has looked to make strategic moves. The company said in January that it would take complete control of Daihatsu, in which it already had a 51% interest, with the goal of strengthening its emerging-market penetration with compact cars. At the same time, the company is reportedly looking at acquiring robotics technology from a key U.S. technology giant to bolster its production processes and improve its research and development efforts.

Meanwhile, General Motors faces the same prospects for a decline in U.S. auto sales, especially if the strength in the domestic economy takes a hit from external factors like the U.K. Brexit vote. Yet the company has made huge progress since emerging from bankruptcy, having improved its vehicle reliability standards and increased its profit margins. GM is even moving headlong into electric vehicles, seeking to create an affordable offering with long enough range to meet the needs of a wider swath of consumers. Uncertainty in Europe, China, and other key international markets has weighed on growth prospects, but General Motors has come a long way from where it was less than a decade ago.

Right now, General Motors looks like a better buy than Toyota. Given all the joint challenges both companies face, GM's higher dividend yield and cheaper valuation offer margins of safety that Toyota can't match.

The article Better Buy: General Motors Company vs. Toyota originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends General Motors. 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.

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