Not long ago -- at the end of 2018, to be exact -- it looked like the automotive sector was headed for a cyclical slump. Most auto stocks fell sharply in the fourth quarter of last year, but some have staged a rebound as earnings have proven to be more resilient than some analysts feared.
Ford Motor (NYSE: F) is a storied automaker that struggled over the last couple of years. It was hit hard in last year's sell-off, but it has rebounded nicely in 2019. Is it a buy?
One way to explore that question is to compare Ford head-to-head with the closest thing the auto sector has to a blue chip: Japanese giant Toyota Motor (NYSE: TM). Here's a look at how the two stack up as investments for new money now.
Valuation and stock performance
There isn't much to distinguish the two stocks when we look at their performance over the last 12 months. Ford is down a bit less than 13%, Toyota a little more.
But it's a very different story when we consider performance since the beginning of 2019. Ford's share price has been on a tear, while Toyota's has been stuck in first gear.
Turning to valuation measures based on earnings, we see that Toyota is currently trading at about 10.1 times its trailing-12-month earnings, while Ford is trading at 13.4 times its earnings over the same period. Given that the historical norm for auto stocks in good economic times is roughly 10 times earnings, Toyota appears to be fully valued by this measure -- and Ford's stock looks a little expensive.
There's a bit more to the story. Ford took a one-time charge of $877 million in the fourth quarter of 2018 to account for on-paper losses in its pension portfolios. Exclude that charge, and Ford's price-to-earnings ratio falls to 9.2 -- not dirt cheap, but arguably no longer expensive.
Looking ahead, Wall Street analysts polled by Thomson Reuters expect both companies' earnings to rise in the current fiscal year versus the year prior. Right now, the analysts estimate that Toyota will earn 812.25 yen per share in the fiscal year that will end on March 31, 2020, on average, giving us a forward price-to-earnings ratio of 8. They estimate that Ford will earn $1.39 in its current fiscal year ending December 31, 2019, on average, for a forward price-to-earnings ratio of 7.3.
Dividends: How Toyota and Ford compare
Toyota pays dividends twice a year. In the fiscal year that ended on March 31, 2019, the company paid total dividends of 220 yen, unchanged from the year prior. That translates to a dividend yield of about 3.4%.
Ford pays a quarterly dividend of $0.15 per share, a rate it has maintained since the beginning of 2016 and plans to maintain through the next economic downturn. That translates to a dividend yield of 5.9%.
We should note that Ford's total dividends per share over the past four quarters ($0.60) is lower than the $0.73 per share that it paid in the four quarters prior. That's because the automaker paid a supplemental dividend of $0.13 in early 2018, but it chose not to do that again in 2019.
The takeaway: Even without the supplemental dividend, Ford's dividend yield is much richer than Toyota's.
Growth and potential risk
Both Toyota and Ford are in the midst of overhauling their processes in an effort to significantly reduce costs and boost profitability over the next few years. Ford's effort is a major one, including significant product-line changes and overhauls of several of the company's regional business units. CEO Jim Hackett describes it as a "redesign" of the business, a step beyond a typical restructuring. Ford expects bottom-line improvements to become more visible over the next year.
Toyota's revamp is more of an incremental one. The company is in the process of moving most of its vehicles to a shared architecture, reducing new-model development time and increasing the number of parts shared "under the skin" of its vehicles to improve economies of scale.
Advantage: It's a wash, really. Ford's effort is more elaborate, but it arguably needed a more comprehensive effort than did its Japanese rival.
With respect to risk, neither company is likely to be in any real danger anytime soon. Both are big employers in their home countries, and both could probably count on government support if a protracted recession wiped out their substantial cash reserves.
But investors in either Toyota or Ford -- or any other automaker -- should keep in mind that this is a cyclical business. That means that sales and profits will rise and fall with consumer confidence. It's usually a safe bet that their stock prices will follow.
So which is the better buy for new money now?
Of the two, Toyota is bigger, stronger financially, and richer. If and when the next recession arrives, it's likely to weather the economic storm without too much fuss. It's a good bet to weather the tech-driven "disruption" storm, too: Some automakers may not thrive in the new era of electrified, automated mobility, but -- right now, at least -- Toyota appears to be in fine shape on that front. And it pays a decent dividend.
That said, I think Ford is the more interesting investment right now. While Toyota is unlikely to get clobbered in a recession, it's so big and healthy that there may not be a whole lot of upside. Ford isn't quite as big, and it's arguably not quite as healthy, but it's in no real danger of crashing -- and there's a good chance that its parallel efforts to optimize the profitability of its "legacy" business while investing aggressively in future tech will pay off handsomely over the next several years.
On top of that, Ford's dividend is more than decent -- it's quite good. While Ford's stock might dip more than Toyota's in the next recession, whenever it arrives, that could turn out to be a boon for investors who choose to reinvest the dividend.
Long story short: If you're worried about downside, Toyota is probably a somewhat safer play. But if you're looking for upside, you can afford to hold for several years, and you don't mind some ups and downs along the way, then Ford seems like the winner here.
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