Ford Motor Co. (F) and General Motors Co. (GM) possess an unusual pairing of superlatives: The auto makers boast two of the highest dividend yields in the S&P 500 (.SPX) while also having two of the lowest price-to-earnings ratios on a forward-looking basis.
The two motor companies were battered heading into 2019, hurt by sluggish auto sales and fears of exposure to simmering trade tensions with China. Another overhang for the duo: higher interest rates, which make it more expensive for consumers to borrow money to buy cars.
Ford finished 2018 down 39%, while GM’s stock lost 18%, compared with the S&P 500’s 6.2% decline. So far this year, auto makers have recovered in step with the broader stock market. GM shares have rallied 14%, while Ford is up 33%. In addition to some progress in China-U.S. trade talks, the headwind of higher rates has largely dissipated, with interest rates falling and the yield on the 10-year U.S. Treasury note dipping below 2%.
Another reason for the two stocks’ current attractiveness is that they appear cheap by at least one common measure. Ford’s stock is trading at 7.2 times the company’s forward earnings, while GM’s is trading at 5.9 times its forward earnings, according to FactSet. Those ratios are slightly below their respective five-year averages of 7.6 times earnings and 6.4 times earnings, respectively, and far lower than the 17.1 times forward earnings at which the S&P 500 currently trades, FactSet data show.
In addition to being relatively cheap, both stocks are boasting high dividend yields. Ford’s dividend yield is a whopping 5.9%—one of the highest among S&P 500 companies—while GM’s is 4%.
Both companies still have their issues. Analysts say it is fine and well to offer hefty dividends, but the big question is how sustainable those dividends are. GM, for instance, is anticipating a temporary profit boost in 2019 resulting from job cuts and plant closures. Ford has also been cutting jobs to reverse profit declines. U.S. car sales also continue to struggle, as the industry has posted six consecutive months of sales declines.
Still, the U.S. and China appear to be moving toward an agreement in their trade disputes. With those tensions still hanging over the industry, it remains a tough time for many people to decide to buy a car—typically one of the biggest consumer purchases outside of home-buying—according to AutoData, which tracks vehicle sales. This could make for volatile times for the industry in the short term.
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