Toyota Motor Corporation TM, one of the leading automakers in the world in terms of sales and production, is likely to gain from an increase in sales volume. However, rising R&D expenses and capex remain a concern for the automaker.
Let’s see why you should retain this Zacks Rank #3 (Hold) stock in your portfolio.
Increase in Sales Volume, Investor-Friendly Move to Aid TM
The surge in hybrid adoption is boosting Toyota’s sales. The RAV4 model, with hybrid variants that make up about half of Toyota’s sales, is America's top-selling SUV. In May 2025, Toyota introduced the 2026 RAV4, which will have the same hybrid or plug-in hybrid options as before, but this time, a conventional version powered by a gasoline engine will not be available. This strategy will leverage TM’s dominant position in the hybrid market.
Upbeat outlook for fiscal 2026 sales sparks optimism. The company expects to sell 9.8 million units this fiscal year, up from 9.36 million sold in fiscal 2025. Toyota and Lexus vehicle sales are estimated to reach 10.5 million units, up 2.2% from fiscal 2025, on the back of strong demand in North America. Electrified vehicle sales are expected to reach 5.12 million units, up from 4.75 million units in fiscal 2025. Higher expected year-over-year sales are likely to boost the company’s top-line growth in fiscal 2026.
Toyota aims to lower hydrogen costs by promoting its use in commercial vehicles. It plans to sell its hydrogen-powered units externally, encouraging broader adoption beyond its own fleet. By increasing overall hydrogen demand, the company expects economies of scale to drive down production and distribution costs. This strategy also supports the expansion of hydrogen infrastructure, further lowering long-term expenses. Its cost optimization efforts are expected to be a 250-billion-yen tailwind to consolidated operating income in fiscal 2026.
Toyota’s investor-friendly moves also spark optimism. In fiscal 2025, the company paid a total dividend of 90 yen a share, up from 75 yen in fiscal 2024. For fiscal 2026, Toyota has provided a dividend forecast of 95 yen per share. Over the past five years, Toyota’s dividends have grown at an annualized rate of 10.04%.
Rising Expenses & High Debt to Ail Toyota
Operating income for fiscal 2026 is projected to be ¥3.4 trillion, indicating a contraction of 29% year over year. Material prices, forex rate and tariffs imposed by the U.S. government on vehicle and vehicle parts imports, along with investment in human resources and growth areas, are expected to be a big hit on the operating profits in the current fiscal. In fiscal 2026, Toyota plans to spend a total of more than 2 trillion yen on these. Pretax profit is estimated to be ¥4.18 trillion, implying a decline from ¥6.41 trillion generated in fiscal 2025.
High R&D expenses on advanced technologies and alternative fuels for the development of electric and autonomous vehicles bode well for the future but are likely to limit the near-term margins. For fiscal 2026, R&D costs are expected to be ¥1.42 trillion, implying an uptick from ¥1.33 trillion recorded in fiscal 2024.
Capital expenditure for fiscal 2026 is expected to increase from ¥2.13 trillion to ¥2.3 trillion. While such massive spending might boost long-term prospects, near-term cash flows could be under pressure.
Toyota's rising debt levels play spoilsport. Long-term debt was ¥23.63 trillion as of Sept. 30, 2025, up from ¥22.96 trillion as of Sept. 30, 2025. Toyota's debt-to-capitalization stands at 38% versus the industry’s 29%.
Stocks to Consider
Some better-ranked stocks in the auto space are General Motors Company GM, OPENLANE, Inc. KAR and Garrett Motion Inc. GTX, each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for GM’s 2025 and 2026 EPS has improved 8 cents and 20 cents, respectively, in the past seven days.
The Zacks Consensus Estimate for KAR’s 2025 sales and earnings implies year-over-year growth of 9.4% and 48.2%, respectively. EPS estimates for 2025 and 2026 have improved 9 cents and 11 cents, respectively, in the past 30 days.
The Zacks Consensus Estimate for GTX’s 2025 sales and earnings implies year-over-year growth of 2.6% and 16.7%, respectively. EPS estimates for 2025 and 2026 have improved 12 cents and 22 cents, respectively, in the past 30 days.
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Toyota Motor Corporation (TM): Free Stock Analysis Report General Motors Company (GM): Free Stock Analysis Report OPENLANE, Inc. (KAR): Free Stock Analysis Report Garrett Motion Inc. (GTX): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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