Toyota Motor (TM 8.52%) stock burned rubber this morning, ripping ahead 7.8% through 10:10 a.m. ET. But what’s behind today’s sudden rise?
According to Bloomberg, it’s “expectations of a higher return-on-equity” from the Japanese automaker, and in particular, rumors Toyota wants to “double” its return on equity.
What is return on equity?
The Motley Fool defines return on equity as a company’s net income divided by shareholders’ equity — but basically you can think of ROE as just a measure of how profitable the company is.
If even that sounds vague, that’s OK. Because the rumors of Toyota’s desire to double its return on equity are also quite fuzzy. The rumor seems to have been started by an observation in Nikkei Asia yesterday that Toyota wants to achieve a 20% ROE — sometime — versus the 11% ROE it’s expecting this current fiscal year.
Nikkei cited an unnamed “executive with the automaker” as its source. Bloomberg said the ROE target was first revealed in the company’s latest interim financial results — except it wasn’t.
Reviewing all the financial results Toyota published in its Nov. 6 release, I found no reference to a 20% ROE target anywhere therein. Toyota did present one chart in which it showed a rough doubling of shareholder returns through additional share buybacks in the current fiscal third quarter of 2024. As far as ROE goes, though, all Toyota said was that its first-half 2024 ROE was 11.1% — significantly lower than last year’s first-half ROE of 17.2%.
Is Toyota stock a buy?
These figures do suggest that Toyota should want to improve its ROE, and get profits back closer to what Toyota was earning a year ago. But they don’t amount to a promise to do so.
Meanwhile, Toyota stock is selling for close to 10 times trailing earnings (with negative free cash flow), paying a 3.2% dividend yield, and is expected to grow profits at less than 1.5% annually over the next five years. Other automotive stocks — Honda Motor for example — look much more attractive on all those metrics, and I prefer Honda over Toyota today.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
