General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) are the two premier automakers in the U.S., and both of them are also best-in-class dividend stocks. But which stock is the better buy?
It’s not as simple as merely seeing which stock has the higher yield. Investors should examine the stocks closely.
Which dividend is more sustainable? How are the businesses expected to do this year? These questions are vitally important when examining the prospects for GM and F stock.
General Motors Company Dividend Outlook
Currently yielding 3.2%, GM stock is making major moves to return even more money to shareholders.
At the urging of activist investors threatening to incite a proxy fight, GM announced a $5 billion stock buyback plan on Monday, also raising its quarterly dividend by 20% from 30 cents to 36 cents. GM stock’s new dividend yield hovers around 3.8%.
GM stock investors were right to demand a better dividend program. Before today’s move, its payout ratio — the percentage of earnings that the company gives back via a dividend — stood at 26%, an extremely low level that suggested General Motors had plenty of room to boost dividends. Especially after it failed to increase its dividend last year.
The new payout ratio will still be low, at just under 32%, and 2015 will be an important year for the company, which is trying to put its recent recalls due to a faulty ignition switch behind it. Analysts expect modest sales growth of 2.4% in 2015.
But GM’s prospects as a dividend stock don’t begin and end with its recent dividend hike and impressive yield. The company, after hoarding $25 billion in cash, has agreed to only keep $20 billion on its books at any point in time, which should be enough to weather a recession. But over time, GM will decrease its minimum level of reserves, implying that GM stock will have more cash to throw off to investors.
Ford Motor Company Dividend Outlook
Ford stock currently matches GM on a straight-up dividend yield comparison (after accounting for GM’s new payout), divvying out 3.8% annually. On top of that, Ford has a two-year track record of increasing its payout, which beats the heck out of the zero-year streak GM had coming into Monday.
But a higher dividend yield doesn’t necessarily mean income investors should buy F stock before GM shares. Ford pays out a higher percent of its earnings to shareholders — 38% — which constrains its ability to hike dividends in the future.
F stock will face pressure from its business in Europe and Russia, where slumping currencies and faltering economies are expected to hit the automaker’s results in 2015.
That leaves the U.S. as F stock’s most important market, and Americans haven’t exactly been snapping up Fords this year: Sales fell 2% in February year-over-year, missing estimates for a 5.8% jump by a mile.
Conclusion
The dividends are roughly equal now, but GM is the better stock to buy. As it recovers from its 2014 ignition switch recall fiasco, increases its dividend and buys back shares, GM stock is well-positioned for the long run.
Both companies will likely have to deal with lower demand from China; Tesla Motors Inc (NASDAQ:TSLA) today decided to cut jobs in that country after an extended period of soft demand made the size of its sales force uneconomical.
TSLA’s decision should remind investors that the auto industry is unapologetically cyclical, and demand tends to come and go in waves. With GM’s newly outlined plan detailing its capital strategy that keeps recessions in mind, income investors can sleep soundly with GM stock in their portfolio.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
