In 2008, after eclipsing General Motors in terms of the number of vehicles sold, Toyota became the largest automaker in the world. It remains one of the largest companies in Japan and the entire world in terms of revenues. Nevertheless, with a presence in more than 170 countries and territories, this automaker has also been popular among tenured investors. This article lists and discusses the advantages and disadvantages of Toyota stock.
Driving Your Portfolio: Weighing The Pros and Cons of Investing in Toyota Stock
Pros: Advantages of Toyota Stock
Toyota stock is traded on different stock exchanges. These include the Tokyo Stock Exchange and the Nagoya Stock Exchange in Japan, the London Stock Exchange in the United Kingdom, and the New York Stock Exchange in the United States.
Note that the company has been credited for its innovative and disruptive accomplishments in the automotive industry. It was the first automaker to produce more than 10 million vehicles per year and its Toyota Corolla remains the all-time best-selling vehicle in the world.
Toyota has also been recognized for its leadership in the development and sales of hybrid electric vehicles. Part of its growth strategy is to develop capabilities in producing fuel-efficient vehicles and electric vehicles. Below are the specific advantages of Toyota stock:
• Large-Cap Stock Advantages: Large-cap stocks have several advantages over mid-cap stocks and small-cap stocks. These include established stability, demonstrated leadership capabilities, availability of market information and track record of performance, and lower liquidity risk. Toyota is a large-cap stock.
• Historical Dividend Payment: Another advantage of Toyota stock is that it has a record of releasing dividends. Note that it issues both preferred stock and common stock. Its preferred stock is a dividend-paying stock which is ideal for investors seeking passive income or building an income-earning portfolio.
• Established Global Presence: The company has a strong global presence. Its vehicles are popular because of their value relative to competitors and their strong after-sales support. Investing in this company also means investing in established regional markets and the potential of emerging regional markets across the world.
• Segmented Market for Vehicles: It produces different vehicles for different segments in the market. It has vehicles for entry-level, mid-range, and high-end or luxury consumers. It also produces and sells vehicles of different sizes and configurations to cater to the diverse needs of the entire vehicle market.
• Diverse Brands and Ownership Stakes: The company owns the Toyota, Lexus, Daihatsu, and Hino brands. It also owns stakes in competing Japanese automakers such as Subaru, Mazda, Suzuki, Isuzu, and Yamaha. Investing in Toyota means investing in its strong presence in the automotive industry.
• Prospects for Further Growth: Part of the growth strategy of Toyota is to develop and produce next-generation vehicles using next-generation engines that are either fuel-efficient or provide alternatives to fossil fuels. The specific hybrid and electric markets are poised for further growth in the future.
Cons: Disadvantages of Toyota Stock
Industry incumbents such as Ford Motor, General Motors, Mercedes-Benz, and Volkswagen, in addition to the emergence and expansion of vehicle manufacturers from China, continue to threaten the current position and prospects of Toyota.
The company might be a leader in the hybrid electric vehicle market but it has been criticized for its unhurried adaption of battery-powered electric vehicles. Tesla dominates the entire electric vehicle market due to its battery technologies.
It is also important to underscore the fact that the automotive industry is part of the consumer discretionary sector. The financial performance of automakers is tied to the condition of the economy. Below are the specific disadvantages of Toyota stock:
• Cyclical Nature of Performance: Toyota is a cyclical stock. Note that the performance of cyclical stocks and their issuing companies is tied to the boom and bust phases of the economic cycle because their revenues are dependent on the prevailing economic condition. This is another disadvantage of Toyota stock.
• Exposure to Currency Risks: Investing in stocks has risks but specific types of stocks have more exposure to a particular risk. Global companies are exposed to the risks associated with the fluctuations in the foreign exchange market. This can impact its expenditures, revenues, and profitability.
• Supply and Production Issues: It is also important to note that the performance of automakers depends on their access to supplies or availability of such. Disruptions in the global supply chain can affect its production. These disruptions can stem from geopolitical tensions, natural disasters, and trade laws.
• Impacts of Competitive Forces: The company is pressured to spend heavily on marketing and product research and development to maintain its brand equity and also keep track of current trends. The presence of competitors also raises the bargaining power of its suppliers and consumers.
• Significant Debt and Liabilities: It also has significant debt. Its net debt-to-equity ratio is considered high. Note that debt obligations supersede obligations to shareholders. The company also has high operational expenditures because automaking is a capital-intensive business that requires huge resource inputs.
