The market is in correction mode right now, so it’s not a fun time to be buying much of anything. But these are precisely the times you need to be putting your buy list together. While the overall market is still expensive and may have further to fall, there are some outstanding bargains out there. For those with an iron gut, this is the time to start nibbling.
Let’s take a look at Ford (F). Ford stock has taken a nose dive in 2015 and is now down about 18% from its 52-week high. China woes, Fed angst and volatility in general have all conspired to depress Ford’s stock price. But looking past the headlines, there is a lot to like about F stock.
Let’s take a look.
Ford Stock Is Cheap
We’ll start with valuation. No matter how you slice it, Ford stock is cheap at today’s prices. F changes hands at just 7 times expected 2016 earnings, and it sports a 10-year cyclically adjusted price earnings ratio, or CAPE, of just 6.6.
Stripping out the accounting gimmicks that can manipulate earnings, Ford stock trades at 0.4 times sales.
And let’s not forget that that sales have been depressed for years. Auto sales fell off of a cliff during the 2008 meltdown and have only recently returned to pre-crisis levels. If you can believe it, annual American auto sales are still below the levels of the early 2000s, despite the fact that the American population has grown by more than 30 million people since then.
Ford’s dividend yield is also one of the highest among major American companies at 4.4%. And seeing as how F stock only pays out about 60% of its (depressed) profits in dividends, I would say the dividend is safe for the foreseeable future.
If you owned Ford stock during the mid-2000s, this might be something of a sore spot. F cut its dividend in 2006 and eliminated it entirely a quarter later as the company worked through some difficult times. But since reinstating its quarterly dividend in 2012 at 5 cents, Ford has tripled it to 15 cents.
I expect more dividend hikes to come.
Auto Industry Still Faces Challenges
The American auto industry has been facing major headwinds for decades. Foreign competition is relentless, and American automakers have the added difficultly of struggling to compete with a punishingly strong dollar. Plus, better public transit and the rise of Uber have made owning a car a lot less necessary in major urban areas. Capping it off, millennials as a generation are just flat-out less interested in driving than previous generations.
I get all of that. But the average age of American cars still on the road just hit an all-time record high this year at 11.5 years. That’s not saying that the average life of a car before getting scrapped is 11.5 years. That’s the average age of cars currently in use. That means that a significant portion of the American auto fleet is older than that.
Hey, cars are built better today than they were 20 years ago, and you can drive them for longer, but at some point, they really do have to be replaced. Americans have avoided making car purchases for years due to the sluggish economy and lack of wage growth. That trend won’t last forever.
Bottom Line
I’m not currently long F stock, but earlier this year, I opted to buy competitor General Motors (GM) for essentially the same reasons. General Motors’ valuation is in line with Ford’s, though General Motors has the benefit of a slightly cleaner slate after its bankruptcy swept away some of its legacy debts.
Today, I would recommend both F and GM. It’s hard to find cheaper pricing and a higher dividend among mainstream American stocks.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long GM. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
