Published on May 13th, 2017 by Nicholas McCullum
The automotive sector is a surprisingly good source of high dividend stocks with attractive valuations. Ford Motors (F) is no exception.
Right now, Ford has a dividend yield of 5.5% and a price-to-earnings ratio of ~6 (using adjusted earnings). This qualifies the company to be included among a short list of stocks with 5%+ dividend yield, perfect for retirees and other income-oriented investors to find potential high income investments.
Ford’s low price-to-earnings ratio & high dividend yield help it to rank well using The 8 Rules of Dividend Investing.
This article will discuss the investment prospects of Ford in detail.
The company’s early days are remembered for the creation of the moving assembly line, as well as the introduction of the $5 work day – twice the normal rate for factory employees at the time. This drove 10,000 to line up outside the factory and request employment.
Today, Ford is a veritable automotive conglomerate.
Source: Ford First Quarter Investor Presentation, slide 4
The company reported total revenue of $39.1 billion in its most recent quarter and total net income of $1.6 billion. Judging from these two numbers, we can see that the company is a low-margin business, with a net profit margin of ~4%.
Being a low margin business does not exclude Ford from being a good investment – the company’s growth prospects, shareholder-friendliness, and competitive advantages make up for lower profit margins.
Ford’s growth prospects come from its research & development spending, which results in product improvements and the creation of new vehicles. The company spent $7.3 billion in research and development in 2016, and $6.7 billion in both 2014 and 2015.
Source: Ford 2016 Annual Report, page FS-12
Ford’s growth will also be assisted by its external investments in new automotive technology.
Ford is making strides to enter the autonomous driving segment, largely through purchasing stakes in smaller startup companies. A prime example of this is Ford’s $1 billion investment in Argo AI, an autonomous driving startup led by previous Google (GOOG) (GOOGL) and Uber (UBER) leaders.
The company also has partnered with Amazon (AMZN) to include Amazon’s voice assistant, Alexa, in Ford vehicles.
This partnership gives Ford vehicle owners the capability to listen to audiobooks, add items to an Amazon shopping cart, transfer locations to Ford’s navigation software, and play music without lifting a finger.
Ford’s investment in emerging technologies will reward the company for years to come, and help protect its business from the pressures resulting from newer competitors like Tesla (TSLA).
Competitive Advantage & Recession Resiliency
Ford’s competitive advantage comes from its economies of scale and brand recognition.
As the second-largest domestic automotive company behind General Motors (GM), Ford benefits from economies of scale due to its existing manufacturing centers and continuing relationships with suppliers. The automotive industry has substantial barriers to entry – it is very capital-intensive to design cars and build factories – which reduces competition and benefits established market participants like Ford.
Ford also has one of the most well-known brands in the automotive industry. Unlike General Motors – who sells some cars under subsidiary brands like Chevrolet – all of Ford’s vehicles hold the Ford name, helping to build loyalty and recognition among consumers.
Amazingly, Ford’s F-Series trucks have been America’s best-selling truck for 40 consecutive years and America’s best-selling vehicle for 35 years. During this time, Ford has sold 26 million trucks. This would not be possible without Ford’s remarkable level of brand awareness.
Ford also earmarks a large sum of capital for marketing and advertising. The company has spent $4.3 billion on advertising during each of the past 3 fiscal years.
Despite Ford’s competitive advantages, the company will likely not perform well during the next recession.
Automotive stocks are notoriously cyclical businesses – new car sales drop off a cliff when disposable income comes under pressure – and tend to perform very poorly during economic downturns. To put it simply, Ford is not a company you should invest in if capital preservation and downside protection are your number 1 priorities.
This lack of recession resiliency was seen in the financial crisis of 2007-2009. Ford reported a loss before income tax of $2.5 billion in 2008.
Although this performance is not encouraging, it is better than some. Ford – along with Tesla – is one of only two large U.S. automotive companies to have never declared bankruptcy.
Ford’s current balance sheet helps the company to be well-poised to survive any incumbent recession. Ford ended its most recent quarter with total liquidity of $38.3 billion.
Source: Ford First Quarter Investor Presentation, slide 30
$38.3 billion of liquidity is very substantial for a company with a market capitalization of only $43.9 billion.
Altogether, then, Ford appears well-poised to survive the next recession and while this company might not be the most defensive stock in your portfolio, it is highly unlikely to experience bankruptcy or other meaningfully adverse financial events.
Valuation & Expected Total Returns
Expected total returns for Ford shareholders can be estimated by looking at the company’s valuation, dividend yield, and forecasted earnings-per-share growth.
Ford is very attractively valued, and this is one of the main reasons it makes a good investment today. The company reported adjusted earnings-per-share of $1.76 in 2016, which means that today’s stock price of $11 is pricing the stock at a 6.3x multiple of 2016’s adjusted earnings.
A price-to-earnings ratio of ~6 is far too low for a company that has positive expected earnings-per-share growth. Accordingly, it is likely that valuation expansion will be a significant contributor to Ford’s total returns.
Ford’s investors also benefit from the company’s shareholder-friendly distribution practices. Since 2012, the company has returned $15.4 billion to shareholders through a combination of dividend payments and share repurchases.
Source: Ford First Quarter Investor Presentation, slide A1
Ford’s current quarterly dividend of $0.15 is good for a dividend yield of 5.5% based on the current stock price of $11.
Ford also occasionally delivers extra income to its shareholders through supplemental dividends. For example, Ford paid a supplemental dividend of $0.05 per share on March 1, 2017.
Looking next at earnings-per-share growth, Ford has compounded its adjusted earnings-per-share at ~4% over the past four years (the only meaningful years after its recovery from the financial crisis). Barring any significant recessions or economic downturns, Ford will likely continue to grow at a similar rate moving forward.
In the short-term, Ford is actually expecting a modest decrease in earnings-per-share for fiscal 2017 because of the significant investments it is making in emerging opportunities (like autonomous driving). It is likely that the company will continue to grow at a mid-single-digit clip beyond the next fiscal year.
Altogether, Ford’s total returns will be driven by:
- 5.5% dividend yield
- 3%-5% earnings-per-share growth (in the long run)
Which, combined with valuation expansion, will likely lead to double-digit shareholder returns.
Ford looks like a very appealing investment right now.
The company’s low price-to-earnings ratio and high dividend yield help it to rank favorably using The 8 Rules of Dividend Investing.
With that said, Ford is not a very recession-resistant stock. Investors concerned about downside protection and minimizing portfolio volatility should look elsewhere.
If you’re interested in reading more Sure Dividend analysis about Ford, the following articles may be of interest: