F Stock: Great Yield, But is Ford Motor Co.’s Dividend Safe?
Ford Stock: Investors Nervous on Declining Sales
Ford Motor Company (NYSE:F) stock is under constant pressure this year due to concerns that the party is over for U.S. automobile companies. As sales peaked, investors feared that the future will be ugly.
The current stock performance suggests that investors aren’t very convinced about the future of this great American company, which narrowly escaped a collapse after the 2008 financial crisis. Ford stock has dropped over 19% so far this year, at a time when the benchmark index is still in positive territory.
As sales decline after a remarkable growth in the past five years, automakers, including Ford, have started to offer generous discounts to attract buyers. In October, for example, Ford led the discounting among the largest automakers. Average incentives rose 14% to $3,533 per vehicle from the previous year, while Ford’s discount increased 20% to $4,060. (Source: “October U.S. Auto Sales Top Estimates as Incentives Jump 14%,” Bloomberg, November 2, 2016.)
This situation raises a very important question for income investors: when is the time right to exit this trade? If sales don’t recover, Ford won’t be able to maintain its generous dividend payout.
But if you scratch the surface, the situation doesn’t look that ugly. First of all, if you look at the latest earnings report from Ford on its third-quarter performance, the company actually beat consensus estimates and reported earnings of $0.26. Ford was able to perform better than the market consensus despite a huge charge related to a recall. (Source: “Ford Delivers Third Quarter $1.0B Net Income; $1.4B Adjusted Pre-Tax Profit,” Ford Motor Company, October 27, 2016.)
Second, despite this grim sales outlook, Ford didn’t change its full-year pre-tax profit guidance of $10.2 billion. One reason is that the company is experiencing strong demand from overseas, led by its Asia Pacific division, which delivered a record pre-tax profit of $131.0 million. There, Ford surpassed 1-million sales following a record August. (Source: Ibid).
If this rush to sell Ford stock is driven by fears that we’re going to see a repeat of 2008, when sales plunged and automakers failed to stand on their own two feet, then I think this is a gross exaggeration of the current predicament.
The biggest driver of the health of the U.S. economy, consumer demand, is still strong enough to prevent any collapse like the one we saw during the 2008 recession. In September, consumer spending surged by the most in three months as incomes grew, signaling momentum in the biggest part of the U.S. economy.
On the other hand, auto companies are in a much better position to withstand any cyclical downturn in demand. Since emerging from the recession, Ford is generating strong cash from its operations, showing that it’s producing vehicles which it is selling on better margins. Rising from $3.5 billion in 2013, Ford’s free cash flows almost doubled to $8.9 billion last year.
By the end of third quarter, Ford had strong cash and liquidity, including $24.3 billion cash generated by its automotive division, with total liquidity of $35.2 billion. Free cash flow is the most important measure for income investors to find out whether a company producing enough cash after its spending on expansion and regular items like salaries. (Source: Ibid.)
Ford Stock: Final Thoughts
For income investors, I think Ford stock still presents a good value. On current prices, F stock is yielding 5.3%, a return hard to find elsewhere in the market at a time when interest rates are near record lows. Investors are getting three times more in dividends since 2012, as the yearly dividend payout rose to $0.60 per share from $0.20 per share, excluding any special payout. (Source: “Ford Motor Company Stock,” Ford Motor Company, last accessed November 3, 2016.)
I think investors will be better off sticking with their positions as auto companies ride through this cyclical downturn in auto sales. For a long-term investment, F stock still offers a better value than many “junk” names on the street.