What’s your frustration threshold? This is a question you must consider before owning Ford Motor Company (NYSE:F) stock, which has become nothing more than a dividend play.
With a robust dividend of 5.37%, which is more than twice the 2% yield average from the S&P 500 index, makes Ford stock worth looking at more closely. Beyond the rock solid dividend, F stock is also cheap, trading at a just seven times fiscal 2017 consensus EPS estimates of $1.55 per share, which is a massive discount to the S&P 500’s forward P/E of 18.
But, none of these bull arguments seem to matter. Nor will they matter for the foreseeable future.
Ford Stock to Remain in Neutral
F stock closed Friday at $11.14, which is about 12% lower than when I recommended the stock last September. I’ve made tons of great Buy calls over the past several months, but this is one where I owe InvestorPlace readers an apology. Meanwhile, during that same span, investors in Tesla Inc (NASDAQ:TSLA) have made more than 60%. And, year to date, F stock, which is down nearly 8%, has also underperformed General Motors Company (NYSE:GM), which is down just 1.4%.
With reduced prospects in U.S. auto sales, Ford shares will, at best, remain in neutral. The company suffered a 7% year-over-year decline in first-quarter sales. Meanwhile, industry inventories have been climbing from an average of 55 days to now more than 70 days. The rising inventory makes it increasingly tougher for the auto industry, which is capital intensive and produces notoriously low profit margins.
In the case of Ford, in the last five years, its average profit margin has been 4.2%, according to YCharts. This compares to 6.69% for Toyota Motor Corp (ADR) (NYSE:TM) and 4.38% for GM. Investors have now begun to realize that large discounts will continue to chip away at Ford’s bottom line, even if the company sells vehicles at near-record levels for the next couple of quarters.
On the bright side, Ford is now sitting on some $28 billion in liquid cash, which could be used to grow the business. What’s more, despite what many analysts are calling “peak auto,” Ford is still dominant with its line of trucks — particularly in North America. At the same time, however, this same argument could have been made a year ago. Or even two years ago. Yet, Ford shares have only driven lower.
Bottom Line for F Stock
Despite improvements made by Ford management, they are perceived as ultra-conservative, the opposites of Tesla CEO Elon Musk who has energized investors with the company’s technology and growth potential (something with which Ford struggles).
And, while Ford stock — at a forward P/E of 7 — is certainly trading at a cheap valuation, it’s cheap for a reason. So far in 2017, where the indexes are trading at record highs, buying “cheap” has proven to be a highly flawed investment strategy.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
