Whether the glass is half empty or half full right now for Ford Motor Company (F) is a contentious discussion. While 2015 was a record-breaking year for the automaker in terms of revenue, last year is also being hailed by some owners of Ford stock an “as good as it gets” year, with cyclical peak sales now in the rearview mirror. The 26% pullback from F stock since 2015’s high underscores this concern.
The company, however, remains optimistic about its growth prospects going forward. Flush with cash — $14.7 billion in all — and anticipating 2016’s bottom line to be at least as big as 2015’s, it recently committing to a one-time special dividend payout of $1 billion in addition to the regular dividend owners of Ford stock are already getting.
Is Ford getting a little heady at the worst possible time, or is the company truly to the point where it’s generating more profits than it knows what to do with?
Dividends Galore
The news came on Tuesday as part of a preliminary fourth-quarter report … against a backdrop of record-breaking pretax profits, Ford shareholders are going to be given an extra $1 billion worth of dividends in the very near future. That translates into an extra payout right at 25 cents per share in addition to the normal dividend. Over the past four quarters, owners of Ford stock have pocketed 60 cents worth of regular dividends per share.
That $1 billion payout is a tenth (or less) of the $10 billion to $11 billion it expects to book as a pretax profit for fiscal 2015, once all the accountants finish the number-crunching. Whatever the final number is, it’s easily going to top analyst estimates for a pretax bottom line of $9.5 billion.
CEO Mark Fields noted:
“As we close out 2015, we are benefiting from six consecutive years of consistently strong results, and our performance is allowing us to reward our shareholders. This pattern of strong returns gives us a great platform to build on as we enter the year with a focus on strengthening our core business and engaging aggressively in emerging opportunities through Ford Smart Mobility.”
And it’s not as if Ford is stretched terribly thin to pay that healthy regular dividend. Its average payout ratio is right around 31% of earnings, near-term and long-term.
It raises the question … why has the Ford stock price been sinking so precipitously of late?
The Future Matters More Than the Present
Fair or unfair, investors make buy/sell decisions on stocks based on a company’s plausible future rather than its verifiable past. And that’s where Ford is coming up short for most shareholders. That is, 2016’s profit outlook that’s potentially the same as 2015’s (Ford only said it would be equal to or higher than last year’s bottom line, without offering any specific numbers) isn’t encouraging enough.
Fanning the flames of concern is what amounts to an outright admission that cash, one way or another, would be in slightly shorter supply in 2016. Higher costs related to the development of new vehicles and other initiatives will crimp total cash flow
And even if that cash outlay weren’t in the cards, as CFO Bob Shanks noted, “At some point margins don’t grow any further. [The forecast margins for North America] are extremely strong margins [of 9.5%] for a volume manufacturer.”
He’s not wrong, but it’s anything but a bullish case for Ford stock.
Stagnated margins against a credible concern that U.S. auto sales have maxed out means any meaningful growth is going to come from overseas — namely, China, which for most investors doesn’t help the stock’s bullish case.
Despite a bevy of bad news from the Far East of late, it’s worth noting Ford’s sales in China were up 3% in 2015, and the company finished the year in China with a huge year-over-year December sales surge of 27%.
Mark Fields has also expressed optimism about China’s future potential, citing lower consumption taxes in the country and the eventual rebound in the need for fuel-efficient vehicles.
The ongoing deterioration of Ford stock price, though, says investors don’t share the same enthusiasm regarding China … even if the current regular dividend is juicy.
Indeed, as recently as 2014, Ford would have struggled to pay the dividend it’s paying now. One decent-sized (and not unusual) setback could put the company right back into that same fiscal position it was in then, threatening the normal dividend; never even mind threats to any future special dividends.
One could also argue the decision to pay a special dividend rather than raise the recurring dividend is a tacit sign Ford isn’t entirely sure its future will be as bright as its recent past.
Bottom Line for Ford Stock
The bullish thesis for Ford was largely predicated on analyst estimates, which had called for per-share earnings growth from $1.66 in 2015 to $1.95 in 2016, on the heels of only 5% revenue growth. Now the disparity of the top- and bottom-line growth rates is being understandably questioned; even Ford is acknowledging this year’s profit growth will be pressured. Caught off guard, investors are now paying the price for assuming the growth would never end.
There’s still a value argument. The forward-looking price-to-earnings ratio of 6.3 is dirt-cheap. Again though, that’s based on a 2016 per-share profit outlook of $1.95, which is seeming less and less plausible.
In other words, Ford stock was not only priced for perfection, it was priced for a small miracle.
The good news is, the market is closer to being done with the re-pricing effort. It may soon be a value buy, but there’s no telling when it will be a growth buy again.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
