There aren’t a lot of pockets of value out there. Outside of energy and financials — both of which have some pretty significant macro issues they’re having to work through — most stock sectors are priced at levels almost guaranteed to deliver lousy returns from here. One very notable exception are automakers, which are about as cheap as they have been since the pits of the financial crisis. Let’s do a deep dive on Ford Motor Company (F).
Yes, Ford stock is cyclical and its earnings are prone to major booms and busts. But at current prices, Ford stock is priced to deliver at least decent returns in just about any economic scenario short of outright collapse.
And while Wall Street seems to believe that auto sales are unsustainably high, Main Street seems to disagree.
With the exception of Volkswagen AG (ADR) (VLKAY), which is still suffering the fallout of its emissions scandal, most of the world’s other major automakers are having a banner year. Ford, in particular, saw sales rise 20% in February; industry-wide last month, it might have been “the best February in 16 years.”
Meanwhile, Ford stock is priced at a pitiful 0.33 times sales. It trades for just 7 times trailing earnings and 6 times forward earnings estimates for the year. That’s ridiculously cheap in an otherwise expensive market.
Cyclical stocks like automakers can often appear cheap when they are really expensive (and vice versa) due to the boom-and-bust nature of their businesses. Profits are outsized near the top of the economic cycle, making the P/E ratio look deceptively low. And at the bottom of a recession, earnings dry up, making the P/E ratio look deceptively high.
But while sales and earnings are volatile, dividends are a lot more stable. Cyclical companies tend to raise their dividend slowly and deliberately, as they want to avoid having to cut it should business take a turn for the worse.
What Ford Stock’s Dividend Yield Tells Us
Ford yields just north of 4.5%, making it one of the highest yielding large-cap stocks in America outside of the energy sector. Ford eliminated its dividend in 2006, when the company was facing major difficulties. But it reinstated the payout in 2012 and has been growing it at a nice clip ever since.
Over the past four years, the dividend on F stock has tripled. That would be impressive even in a booming economy. But remember, auto sales have been depressed for much of the post-2008 period, and the economy has been tepid at best. That makes Ford’s dividend boosts all the more impressive.
In addition to its regular dividend, Ford stock also will be paying out $1 billion in special dividends to the tune of 25 cents per share, making its total 2016 planned dividends 40% higher than 2015. It speaks volumes that Ford feels confident enough to issue a special dividend, especially considering that less than a decade ago, the auto company was facing possible liquidation.
Ford stock was up Tuesday on the news because of its better-than-expected sales. But F shares are still very inexpensive, and I expect further gains to come.
In an otherwise overpriced market, Ford stock should roll over its competition.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long F.
