Ford Stock Has a Fatter Dividend Yield Than GM, But Is It a Better Buy?
Both the S&P 500 Index ($SPX) and the Nasdaq Composite ($NASX) fell to six-month lows on the last trading day of March. While markets recovered from the lows, the S&P 500 Index fell 5.8% for March, making it the worst monthly performance since December 2022. Markets have been jittery about President Donald Trump's trade policy. Trump has already announced 25% tariffs on auto imports, and is set to announce reciprocal tariffs on April 2. Tariff uncertainty is worsening the already subdued macro environment, with many economists raising their odds of a recession.
U.S. Auto Stocks Have Been Hammered by Tariffs
While almost all market sectors are impacted by tariff uncertainty and recession fears, the automotive sector has particularly been in the line of fire. Both Ford (F) and General Motors (GM) capitalized on the North American Free Trade Agreement (NAFTA) and its successor, the United States-Mexico-Canada Agreement (USMCA), to build an integrated supply chain across the northern and southern borders.
The North American automotive industry is highly integrated and some parts can cross borders multiple times before a vehicle is finished and assembled. No wonder then that automakers have been cautioning against tariffs, with Ford CEO Jim Farley terming them as 'devastating.' Here it's worth noting that GM is more exposed to the tariffs compared to Ford – especially when it comes to Mexico.
Ford Has a Dividend Yield of 6%
There is a stark contrast in capital allocation policies between Ford and GM. The 'Blue Oval' has preferred dividends over buybacks and currently has a yield of almost 6%, which is almost five times that of GM. Ford intends to return between 40%-50% of annual free cash flows to shareholders, and the company has been paying special dividends to help reach its distribution targets.
This year, Ford paid a supplemental dividend of $0.15 to mark the company's third consecutive special dividend, after dishing out $0.18 last year. Ford paid a special dividend of $0.65 in 2023, which it attributed to the return on its investment in electric vehicle startup Rivian (RIVN).
GM, on the other hand, has gone overboard with share buybacks. It announced another $2 billion buyback in February, which was the third authorization within 2 years. Previously, GM announced a mega $10 billion buyback plan in 2023, which it topped up by another $6 billion authorization in June 2024.
Meanwhile, as I noted in a previous article, the likelihood of Ford paying a supplemental dividend in 2026 looks low, and even the current dividend might be at risk. The tariffs might end up eating into Ford's earnings and cash flows, which would leave the company with a lesser pool to distribute to shareholders.
Ford Trades at a Higher Multiple Than GM
Ford trades at a forward price-to-earnings (P/E) multiple of 7.4x, which is higher than GM. The latter has brought down its outstanding share count below 1 billion, which has helped lift its per-share earnings.
GM has fared well on execution also, including in the electric vehicle (EV) segment, where its U.S. market share doubled last year. Importantly, the business generated a variable profit in the final quarter of the year, and GM expects the segment's profitability to improve by around $2 billion in 2025.
Ford, conversely, expects the pre-tax losses of its EV segment to be between $5-$5.5 billion, which is not different from 2024. The Jim Farley-led company also continues to grapple with recuring issues related to warranty costs, which take a toll on its earnings.
Brokerages prefer GM over Ford; the former is rated as a 'Buy' or higher by half of the analysts covering the stock, while the corresponding number for Ford is just over 17%. The pessimism also reflects in their target prices, where the average sell-side analyst projects Ford's stock price to fall modestly over the next 12 months, while forecasting GM to rise by almost 27%.
Should You Buy Ford Stock?
The tariffs have added an additional layer of uncertainty for the U.S. automotive industry at a time when industry-wide pricing is already expected to deteriorate in 2025. Apart from the auto tariffs, Ford and GM will also need to grapple with steel and aluminum tariffs, which will end up increasing their input costs.
Overall, there remains a lot of uncertainty over the tariffs, including their longevity, despite Trump describing them as 'permanent.' Given the current scenario, I don't find Ford stock too attractive and would be on the sidelines for now. However, given its better execution and lower valuations, I would use any further weakness in GM to add more shares.
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