2016 was another big year for the auto industry, and both Ford Motor (NYSE: F) and General Motors (NYSE: GM) enjoyed favorable conditions that included another record year for U.S. auto sales. Yet neither stock has earned much respect from investors, sporting extremely low valuations even after solid performance in their stock prices over the past year. Given how expensive the rest of the stock market has become, many value investors think Ford and GM might be good bargains, but they wonder which one is the better choice right now. Let's look more closely at how Ford and General Motors match up right now on some key metrics to see which could be the better buy.
Continue Reading Below
Image source: General Motors.
Valuation and stock performance
Ford Motor and General Motors have both given their shareholders big gains over the last year, but GM has been the better stock. The company behind the Chevrolet, Buick, Cadillac, and GMC brands posted total returns of more than 30% since January 2016, compared to just a 10% rise for Ford.
Yet even after the big rise in General Motors stock, it still looks cheaper when you compare simple valuation methods. When you look at their earnings over the past 12 months, Ford trades at about seven times trailing earnings, compared to an earnings multiple of just four for GM. Even when you bring in future earnings estimates, GM's forward multiple remains low at just over six, which is less than Ford's similar figure of seven. Both Ford and General Motors have very low valuations, and General Motors has the current edge despite its winning performance recently.
Dividends and return of shareholder capital
Ford and GM also stand out with their extremely attractive dividend yields. Right now, GM has a yield of just over 4%, while Ford sports a slightly higher 4.7% dividend yield. When you add in a special $0.05 per share distribution that Ford made recently, it takes the company behind the Blue Oval logo up to more than 5% on a yield basis.
Ford also has a longer history of dividend excellence, because unlike GM, Ford managed to survive the financial crisis without resorting to bankruptcy protection. After suspending its payout to conserve cash during the crisis, Ford restarted its dividend payments five years ago, and it has tripled its regular quarterly payouts since then. GM has been slower in restoring and growing its dividends, finding other uses for its capital.
One of those uses that GM has taken greater advantage of is making extensive stock repurchases in recent years. Over the past 12 months, for instance, GM has spent more than $2.1 billion on buybacks, compared to just $145 million for Ford. Overall, both stocks have their pluses and minuses on the capital front, leaving it to investors to decide which offers the more attractive combination for them.
Growth and potential risk
Investors aren't entirely sure whether the auto market will be able to sustain its current success in 2017. Some projections have auto sales falling 1% to 2% this year from 2016 levels, although there's a lot of uncertainty regarding whether measures to stimulate the U.S. economy will result in greater economic growth. Indeed, Ford has already warned that profits will likely be down in 2017, and CEO Mark Fields has cited rising costs and unfavorable changes in the value of foreign currencies compared to the U.S. dollar for some of the decline. In particular, North America will be tough for Ford, because it projects higher commodity prices and lower sales volumes in its home market. South American losses should ease a bit, but the U.K. Brexit vote will hold Europe back somewhat. However, spending to offer products like electric and hybrid vehicles as well as features like self-driving cars and personal mobility initiatives could pay off in the long run, even if they hurt profits this year.
For General Motors, the view is more optimistic. With new models coming out, CEO Mary Barra believes that earnings per share will rise in 2017 even if sales are relatively flat. GM sees strength in North America and China along with a recovery in South America, and buybacks will also continue to reduce share counts to spread profits across a smaller number of shareholders. Barra is also enthusiastic about the macroeconomic picture for the U.S. market, and this year should be just the beginning of a cycle of product updates and new vehicles that could drive long-term growth forward in the years to come.
General Motors has a clear edge over Ford currently, with a more upbeat view and lower valuation than Ford. That said, both companies have good prospects that could send the entire industry higher in 2017.
10 stocks we like better than General Motors When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and General Motors wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of January 4, 2017