After the recession, Ford Motor Company (NYSE:F) was rock-solid and dependable, much like its line of pickup trucks. Unfortunately, these days it feels more like one of its subcompact models from the early nineties: weak and prone to breaking down.
Sales over the past year have been light, spooking investors, and shares of Ford have basically stalled since.
However, there is a positive to Ford stock’s recent declines: It’s now paying a high yield at a cheap price. And unlike many high-yield stocks, Ford’s nearly 5% payout is a solid as they come. For investors seeking income, Ford stock is one of the best values on the market today.
Ford’s Sales Skid
Things have been great since the recession for the major automakers. Thanks to cheap credit, new models and plenty of deals, consumers flocked to new cars. Auto sales in the U.S. have increased steadily with vehicle sales showing a meaningful increase month after month. That is, until they didn’t.
Last summer, Ford reported lower sales. At first, investors brushed it off. But with each passing month, Ford’s sales continued flagging. The recession’s pent-up demand for new cars was now gone and analysts augured the end of the auto boom. It didn’t help that Ford also saw sales slide in Europe just as the company became a target for then-President-elect Donald Trump following the November election.
With that, investors started to flee Ford stock like the plague and shares sank nearly 14% last year. And despite a slight recovery in Ford stock, that decline created a tantalizing 4.7% dividend yield and a cheap price-to-earnings ratio of just 11.
Ford Stock’s Dividend Is Safe
The combination of cheap price and high dividend are just enough to start piquing value investors interest, especially considering the payout is as good as gold. That’s because Ford has more than enough cash and cash flow to keep the payout going.
Because most automakers have financing divisions — in this case, Ford Credit — many will report a non-GAAP accounting metric called automotive operating cash flows. It’s basically profit from an automaker’s auto business after taking out all other financing, parts and other activities profits. It’s profit from purely selling cars and it’s what really dictates how healthy an automaker is.
Last year, Ford reported $6.4 billion in automotive operating cash flows. Ford’s total reported dividend was just $3.5 billion. There’s still about $3 billion worth of wiggle room for Ford’s payout at current levels. So even with a drop in sales, Ford is still earning its dividend by a wide margin.
Perhaps even more impressive is just how much cash Ford has on its balance sheet — like, tech-stock levels of cash. As of the end of 2016, Ford has amassed a massive $27.5 billion in cash and short-term investments. Thanks to automotive industry cyclicality, companies in the sector typically carry large cash balances to help them get through the lean times.
That huge rainy day fund will allow Ford to keep funding its high capex spending plans for many years and can be a backstop for its dividend. And if that isn’t enough, Ford has an untapped $13.4 billion revolving credit facility. Think of that as the backstop to the backstop.
Finally, Ford’s efforts to transform itself after the recession have created a better-run company. Lower costs and its stronger balance sheet will allow it to better weather any storm. According to Ford’s chief financial officer, Bob Shanks, the company could still break even if annual U.S. auto sales fell to just 11 million cars. That level is about 37% below last year’s record sales of cars and light trucks.
Boosting Shanks’s outlook was his comment that Ford could make even more money next year, as its newer manufacturing techniques would enable the company to start/stop production and potentially save the company billions in capex.
The key takeaway is that the juicy dividend for Ford stock isn’t going anywhere anytime soon.
Income Investors Need Ford Stock
Ford has pledged to keep its dividend through the business cycle. Considering its cash position and cash flows, it certainly has that ability. Those factors — along with lower breakeven points — will continue to put a floor under its dividend and make it a safe play for investors.
The automaker has taken a different approach to making sure it stays safe and at an amount it can afford. Ford has started to use special dividends to help boost its yield and reward investors when times are better, and its cash flows can support a higher payout. Already Ford stock has had two such payouts. This ensures that the core Ford stock dividend stays in place, while providing a “growing” yield.
In the end, Ford stock and its nearly 5% yield is an excellent dividend to buy in today’s market. F has the goods to keep it going through thick and thin.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
