Toyota Dividend Cut Rumors Baffle Wall Street

by Jeff Reeves | April 8, 2010 2:07 am

A top Japanese newspaper is reporting that Toyota Motor Corp. (TM[1]) will be cutting its dividend. The world’s biggest carmaker has hit a snag recently as brake problems and recalls have hurt Toyota’s image. But if rumors about the dividend cut prove true, investors will be scratching their heads since TM has plenty of free cash already.

Specifically, Toyota’s cash on hand alone amounts to nearly $25 billion to $30 billion. Even with a record $16.4 million fine against Toyota announced this week, there is cash to spare for the company even if sales flatline. However, the Sankei newspaper claims that Toyota will reduce its dividend for the 12 months ended March 31, citing an unidentified executive. Toyota is mum on the report for now, but a dividend cut would be just the second in the history of the automaker.

The first actually came last fiscal year, when TM posted a record $4.7 billion loss as consumer spending dried up and global recession caused car demand to stall. Toyota expects to return to profitability this year even despite its recent recalls, and sales are picking up nicely. In March, for instance, the company led all automakers by posting a 41% year-over-year jump in sales.

Many stocks are reinstating or raising dividends right now after a rough 2009 caused cutbacks. In fact, it’s estimated that in the first quarter, dividend increases in the S&P totaled $6.4 billion[2]. Other companies also appear to be using their free cash to repurchase shares via stock buybacks[3]. So it’s odd to think that Toyota would be getting even more tight-fisted as the trend appears to be the opposite for most of the market.

There are certainly still troubles for automakers. Chrysler could be headed for the scrapheap, and with GM posting a $4.3 billion loss since emerging from bankruptcy (with a projected $12 billion hole in its pension system), some speedbumps are expected. But immediately a Toyota dividend cut a year after a similar slash in payouts could be poorly received.

Toyota shares have dropped about 1.6% in the past three days on the speculated dividend cut. And if the move proves true, there could be further downward moves for TM shares in the works.

Source URL: https://investorplace.com/2010/04/toyota-dividend-cut-tm-stock-recall/

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