Who Comes First? The Shareholders or the Shareholders?

Having admitted wrongdoings, this leading car maker has been hit with a huge penalty and the company knows that appeasing shareholders is top priority, says MoneyShow's Jim Jubak.

This is an update to What Else Must this Company Do? posted on November 8, 2013.

Getting slapped with a $1.2 billion penalty to settle charges of sudden unintended acceleration that led to the recall of ten million vehicles is never a small thing, even for a company as big and profitable as Toyota Motor (TM). And the settlement with the US Justice Department left the company with both a black eye-the company admitted to wrongdoing as part of the penalty deal-and a black cloud hanging overhead-the company was charged with wire fraud, with the prosecution on that charge deferred for three years, as long as the company continues to cooperate with authorities.

But Toyota does seem to understand that the largest penalty ever imposed on a car company in the United States has left it facing a huge repair job with its shareholders. Today, as part of that effort, Toyota announced that it will spend 360 billion yen ($3.5 billion) buying back as many as 60 million shares, or about 1.9% of shares outstanding. The buyback is the company's first since February 2009. Toyota will buyback and retire about half of those shares by the end of June. On the news, the New York traded ADRs closed up 2.09% today. (Toyota is a member of my Jubak's Picks portfolio.)

I don't think this is the last move the company will take to use its huge cash flow to make shareholders happier.

The next move is likely to be a dividend increase. The ADRs now yield 2.3%. With Toyota forecasting a record 1.9 trillion yen profit for the fiscal year that ends on March 31, and saying that it intends to pay out 30% of net income in dividends, I think shareholders could be looking at an increase in the dividend yield this year to somewhere around 3.3%. All in all, Toyota has said it will return 6 trillion yen to shareholders.

I think it's likely that this promised cash return to shareholders will actually increase in fiscal 2015 and fiscal 2016. Dividend yields-based on the current ADR price of $110.53, as of the March 26 close in New York-could rise to 3.6% in the fiscal year that ends in March 2015, and 4.4% for the fiscal year that ends in March 2016, Credit Suisse projects.

Not an absolute guarantee, of course. But in a financial market where good dividend yields are rare, and prospects of solid growth in dividend yields are even rarer, I think Toyota, at a price to earnings ratio of just 9.1 on estimated earnings for the fiscal year that ends next Monday, is a good bet.

As of March 26, I'm keeping my target price at $120 for September 2014 on the ADRs.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Toyota Motor as of the end of December. For a full list of the stocks in the fund see the fund's portfolio here.