Ford Motor Company (F) Stock Has a Secret Weapon

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Some in the media have suggested that Elon Musk was right when he stated sarcastically that institutional investors upset with Tesla Inc (NASDAQ:TSLA) and its corporate governance should buy Ford Motor Company (NYSE:F) instead.

Ford Motor Company (F) Stock Has a Secret Weapon

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Recently, I wondered if Ford stock could ever hit $20, a share price not seen since June 2001. I argued that dividends were not the answer; share repurchases, smart R&D investments and increased debt repayments were.

What I hadn’t thought about were the special dividends.

In early January, Ford declared a special dividend of 5 cents to go along with the usual quarterly payout of 15 cents. That’s on top of the special dividend of 25 cents paid to investors a year earlier.

Over the past 16 months, Ford stock generated $1.20 in regular and special dividends for an annualized yield of 8.1%. That’s awfully hard to resist in the low-yield era.

Ford Stock Special Dividend

In 2016, Ford had $12.8 billion in free cash flow, its highest level in the past decade. Of that, $1 billion was used for special dividends (25 cents multiplied by an average of 4 billion shares outstanding) and $2.4 billion for regular dividends, leaving lots of cash for debt repayment.

Over the past five years, Ford issued and repaid $207.8 billion and $158.3 billion in debt, respectively. In 2012, it added just $3.2 billion in net debt (Debt issued minus debt repaid), its best job of trimming the debt load, followed by 2016 when it added $7.2 billion in net debt.

So the question for owners of F stock going forward is: Which is more preferable — Higher special dividends or increased debt repayment? Income investors would likely answer the former, but that’s short-sighted in my opinion considering higher interest rates are just around the corner.

Ford shareholders would benefit greatly from a leaner balance sheet. That’s especially true considering that profits in 2017 are expected to be lower than this past year, with a nice rebound in 2018 off of new product introductions. That includes the Ford Bronco and higher margins due to $3 billion in cost reductions.

In 2016, Ford distributed $3.5 billion to investors. In 2017, it expects that number to fall to $2.8 billion as a result of a special dividend one-fifth of the size as last year. If Ford’s profits in 2017 are equivalent to those in 2014, its free cash flow should be around $7 billion dollars. That only leaves a little more than $4 billion for debt repayment, share repurchases, etc.

I’m a proponent of share repurchases in this instance because F stock is so beaten up, but I believe debt repayment should take precedence. If Ford stock moves up to $15 by the fall, however, Ford management would be wise to slow its debt repayment and begin buying its stock in earnest as we move into the final quarter of the year.

In 2018, it’s very likely that Ford’s free cash flow will be higher than $12.5 billion, leaving plenty of funds to make another 25 cent special dividend along with several billion in debt repayments and at least $1 billion in share repurchases.

I’m a big fan of special dividends because you can turn the tap on and off as circumstances present themselves whereas regular dividends become something investors get accustomed to — they don’t take kindly to any cuts or outright elimination of these payments.

If you’re an income investor, I think it’s fairly safe that Ford’s regular dividend of 15 cents per quarter will continue well into the future. At a yield of 5.4%, Ford stock is attractive indeed and that’s without the special dividend added to the mix.

That said, I find it hard to believe that over the next five years, F stock will outperform Tesla stock — with or without the special dividend.

Elon Musk might be outspoken, the brightest generally are (think Steve Jobs, Jeff Bezos, etc.), but he’s leading the automotive industry kicking and screaming into the future and that’s always worth a big-time multiple.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/ford-motor-company-f-stock-has-a-secret-weapon/.

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