Auto stocks as a group are cheap right now. There are some good reasons for that:
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- Auto sales are cyclical, and we may be just past the current cycle's peak.
- Big technology-driven changes are coming to the industry, and not all of the current auto giants will adapt to the new self-driving world.
That said, there are some automakers that are taking strong steps to thrive amid the coming technological changes -- and that pay a good dividend right now. Let's take a closer look at four such companies: Bayerische Motoren Werke AG (NASDAQOTH: BAMXF), better known as BMW; Ford Motor Company (NYSE: F); General Motors (NYSE: GM); and Mercedes-Benz parent Daimler AG (NASDAQOTH: DDAIF).
BMW's profitability dipped a bit last year, to an 8.9% EBIT (earnings before interest and taxes) margin from 9.2% in 2015, in part because BMW is ramping up its spending on future technologies. In a presentation at BMW's annual meeting in March, CEO Harald Krueger explained that the company has a plan to boost its profitability in order to more aggressively fund future tech -- specifically, a upcoming range of advanced electric vehicles with self-driving capabilities.
The innovative BMW i3 is just the beginning of BMW's electric-vehicle product plan. Image source: BMW AG.
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Over the next two years, BMW will launch more than 40 new and revised model variants, focusing on high-profit SUVs and upscale models. That product offensive may drive only modest increases in margins and profit, but it will help pay for the technology push that BMW will need to keep pace with companies like Tesla -- not to mention rivals like Mercedes. That in turn should result in significant growth over the longer haul.
BMW's dividend yield is about 4.1%, for a distribution rate (payout ratio) of 33.3%. Its price-to-earnings ratio is about 8.1, a bit low for an auto stock with BMW's consistent profitability, so there's arguably some value here. It has guided for "slight increases" in revenue, sales, and pre-tax profits in 2017.
Ford Motor Company
Ford posted an adjusted pre-tax profit of $10.4 billion in 2016, with an operating margin of 6.7%. On the one hand, both were down (slightly) from 2015 -- but on the other hand, both were good enough to make 2016 the second most profitable year in Ford's century-plus history. Right now, Ford is reaping fat profits from a global market that is hot for the things it does best: trucks and SUVs.
Today's big sales of hugely profitable pickups are funding Ford's investments in the future -- and a nice dividend. Image source: Ford Motor Company.
But where will that leave Ford in the future? CEO Mark Fields is aggressively implementing a comprehensive plan to ensure that Ford continues to thrive and profit as the industry evolves. The gist is that the Blue Oval is doubling down on what it does best, boosting the parts of its current business that lag, and making big investments in electric vehicles, self-driving, and new mobility-related businesses. The aim: significant bottom-line growth over the next several years, no matter what the new-car markets do in the near term.
Right now, Ford looks like a bargain. It's paying a stout (and probably sustainable) 5.1% dividend yield, and trading at about 6.9 times its expected 2017 earnings. The company has guided to a modest year-over-year drop in pre-tax profit in 2017 on those aggressive new-tech investments, but expects profits to be significantly higher in 2018.
Like its old rival Ford, GM is making big bucks right now: $12.5 billion in adjusted pre-tax profit in 2016, with a margin of 7.5%. And like Ford, it has a plan to significantly boost its profits over the next several years. Part of that plan involves taking better advantage of the vast global scale in GM's existing businesses, but another part has to do -- yes -- with electric cars and self-driving.
More than most of its rivals, GM has something tangible to show on those fronts. Others may be planning affordable long-range battery-electric vehicles, but GM's Chevy Bolt is shipping right now. And CEO Mary Barra has dropped some strong hints that more GM electrics are on the way, soon.
GM CEO Mary Barra with a Chevrolet Bolt EV equipped with a prototype of GM's self-driving system. Image source: General Motors.
The assembly line that builds the Bolt has already produced self-driving versions for testing, and it's expected to build "thousands" more soon for a big, multi-city self-driving test with ride-hailing start-up Lyft.
Did I mention that GM owns a 9% stake in Lyft? Or that it has started (and is rapidly expanding) its own car-sharing company, Maven? Or that the Bolt appears to be key to both efforts, having been designed as both a technology platform and a taxi?
You get the idea. Of all of the "legacy" automakers, GM is arguably farthest out in front in meeting the challenges presented by high-tech "disruptors." Meanwhile, it's a solid buy: Its deliberately conservative dividend is yielding about 4.3%. it's trading at just 5.9 times its 2016 earnings, and it has guided for higher revenue and pre-tax profits in 2017.
Daimler had a great year in 2016. Sales in its Mercedes-Benz Cars unit rose 10%, helping to drive a strong 9.1% EBIT profit margin in that unit. Like its rivals, Daimler is making hay on strong global demand for luxury vehicles, especially SUVs. And like its rivals, Daimler is reinvesting a big chunk of its fat profits in electric vehicles and autonomous-driving technology.
But with Daimler, there's an intriguing twist: It isn't just the parent of Mercedes-Benz cars, it also builds a lot of medium and heavy trucks. If you think self-driving cars are an interesting profit opportunity, think about the possibilities for self-driving long-haul tractor-trailers that can travel in energy-efficient automated convoys.
A self-driving convoy of Mercedes-Benz tractor-trailers in a test on the Autobahn last year. Note the position of the driver's hands. Image source: Daimler AG.
Oh, and Daimler has electric trucks on the way, too. And, of course, electric cars and SUVs that will bring Mercedes' reputation for quality and luxury to the battle with Tesla.
Daimler's upcoming dividend gives a 4.7% dividend yield and a 41% payout ratio. Its ratio of price to last year's earnings ratio is a little richer than the others' at 8.7, but it's still somewhat cheap by historical standards. Daimler has guided to small increases in revenue, sales, pre-tax earnings -- and, not surprisingly, spending on research and development -- in 2017 versus 2016.
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