- Toyota has announced a $3.5 billion buyback plan.
- The company's ADRs have lagged behind its rivals.
- The company is sitting atop a massive pile of cash which is bigger than Tesla's market cap.
- The company has fallen behind other leading S&P 500 companies in terms of returning cash to shareholders.
- Toyota is eyeing record levels of profits and sales.
After a gap of five years, the world's leading automaker Toyota Motors (NYSE:TM), has finally decided to buy back shares. Following a shareholders' meeting in June, the company will start purchasing shares worth $3.5 billion over a 10-month period.
So why is Toyota buying back shares?
Firstly, Toyota's shares have lagged behind the S&P 500 and some of its rivals. A buyback at this stage could give a boost to investors' confidence. In the last 12 months, the S&P 500 has risen by more than 18%, Toyota's biggest rival General Motors (NYSE:GM) has been up 23% while the German automaker Volkswagen (OTCQX:VLKAY), which trades in the OTC market, has risen by 30%. On the other hand, Toyota's American depository receipts have been up by just 8.3% in the corresponding period.
Secondly, Toyota has a lot of cash. Toyota's previous quarterly results revealed that the company's cash reserves had grown by 24% from the corresponding period last year to an enormous $34.9 billion. In other words, Toyota had $9.3 billion more cash than Tesla's (NASDAQ:TSLA) current market cap. The auto giant was truly sitting on a massive pile of reserves. The company could have used this cash to invest in itself or return this to the shareholders.
The company had invested heavily to construct factories before 2008 but currently, Toyota does not intend to build any additional factories for the next couple of years. On the other hand, Toyota has leaned towards buybacks. If the current buyback plan is approved, then Toyota will repurchase 60 million shares. The company will then use half of the shares to benefit a charity foundation which it is establishing and will cancel the remaining 30 million shares.
Although Toyota has not spent a bigger amount on buybacks in more than 10 years, the current plan is still just around 10% of its cash reserves.
Thirdly, Toyota has fallen far behind other leading S&P 500 corporations that have spent billions buying back shares over the last five years. As mentioned earlier, Toyota's stock has already underperformed. A drought of buybacks over a long period had further exacerbated the situation. A buyback now can have a positive impact on investor's sentiments.
Since 2009, unlike Toyota, other companies, particularly the technology giants, have spent billions as buyback expenditure. The buyback king, however, has been the oil giant Exxon Mobil (NYSE:XOM), which has repurchased more than $90 billion of its stock. Exxon Mobil is followed by tech majors IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT). The former has spent $63.7 billion on buybacks in the last five years while the latter has spent $37.5 billion.
Overall, 13 S&P 500 companies have spent more than $25 billion each on buybacks. Of these, 7 companies are from the technology sector. The list also includes Apple (NASDAQ:AAPL), which has doled out a little less than $30 billion in buying back shares, even though the company started buyback activity just 2 years ago.
Fourthly, Toyota's bottom line has also considerably improved and it is now expecting record level of sales and profits in the near future. The company has struggled due to natural disasters while its massive vehicle recalls not only had an adverse impact on its earnings, but it also damaged its reputation.
The company has pulled itself together by showing significant improvements in its revenues and income. In its previous quarterly results, Toyota's net profit increased by more than five-folds to $5.2 billion while net revenues increased by 24% to $64.4 billion.
Toyota is now expecting record levels of profits of 1.9 trillion Yen, or more than $18 billion, for the fiscal year ending March as the company benefited from record sales and weakness in domestic currency.
Toyota's vehicle sales have been higher than ever. The company has forecast to deliver sales of more than 10 million vehicles in the current fiscal year. No other company in the world has ever crossed the 10-million benchmark; although Toyota's rivals General Motors and Volkswagen are also nearing the milestone.
Last year, Toyota reported sales of 9.98 million vehicles. If it manages to touch its estimate, then Toyota would report vehicle sales growth of 3%.
*The figures in this article have been converted using 1 Japanese Yen equals 0.0098 US Dollar.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.