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Ford Motor Company (F) Stock Is a Sneaky Good Buy

A fat dividend and cheap valuation make F stock a dream at current levels

Ford stock - Ford Motor Company (F) Stock Is a Sneaky Good Buy

Source: Sean Davis via Flickr (Modified)

Shares in Ford Motor Company (NYSE:F) are gradually recovering from a six-month low hit after July auto sales stoked fears of a market plateau, but Ford stock is still a bargain offering an outstanding dividend.

Ford Stock Is a Sneaky Good Buy for Value InvestorsFord stock and peers are under pressure by the cyclical slowdown in car sales, but these fears are overblown. Heck, even if they’re not, how much cheaper does F stock have to get before a worst-case scenario?

Price appreciation has been hard to come by for Ford stock and it’s hard to see shares outperforming the broader market anytime soon. Ford stock was disappointing even when the automaker was racking up record figures.

But that doesn’t mean it should be ignored as a patient play. Valuation has a tendency to revert to the mean given long enough horizons.

Moreover, equity income investors starving for yield need look no farther than F stock. Indeed, shares routinely throw off one the highest yields in the S&P 500.

But lagging performance and anxiety over a supposed “car recession” are steering too many investors away from Ford stock. Here’s why.

Ford Stock’s Hidden Charms

1.) As noted briefly above, F stock is cheap. Like, really cheap. Shares change hands at 6.6 times forward earnings. Telecommunications and utilities don’t go for such low multiples, even in normal times, and those sectors aren’t exactly fountains of growth.

At the same time, analysts figure that Ford stock has a long-term growth rate of 9% a year. Ordinarily, a price-to-earnings multiple trades at a premium to the growth rate, not — as in Ford’s case — at a discount. Clearly, the market has already baked in plenty of bad news.

2.) Ford’s dividend makes it easy for investors to wait out a period of underperformance. As mentioned, Ford stock regularly offers one of the most remunerative equity income streams the market has to offer. As of Tuesday morning, Ford’s yield was the 12th highest among stocks in the S&P 500. And that’s after it rose more than 1% in early trading, which caused the yield to fall.

As for reliability, Ford has hiked the payout for three consecutive years, or ever since it regained its footing after the financial crisis and recession. Then there’s the reassuring fact that F generated $13.5 billion in free cash flow over the trailing 12 months.

3.) The market is right to worry about the immediate course of the car market. It’s cyclical, after all, and is bound to cool off after several years of pent up demand. Ford is very much aware of this. Quarterly earnings came with a warning about profit projections in light of a sales peak, the Brexit and numerous other issues.

Fair enough. No one is saying that Ford stock is going to be a winner right away; just that it’s cheap and good luck calling the bottom. Shares are now down 12% for the year-to-date and nearly 20% in two years. How much more negative can sentiment get?

4.) The market is fixated on the past when it comes to auto stocks. And it’s not all doom and gloom out there. Stocks are forward looking, but let’s not lose sight of Ford’s momentum either. It’s finally resurrecting European operations with a record pre-tax profit last quarter. Margins and earnings hit their own highs in North America too.

This is a far more creative, cost-conscious and nimble company now. It actually has one of the industry’s better operating margins. True, it’s coming up against tough comparisons vs. last year’s popular F-150 pickup, but a promising line of global product launches should help offset that.

5.) Judging by the market’s reaction, the market doesn’t think much of Ford’s shorter-term prospects. Fine. That just lowers the bar for future earnings reports. Sure, it’s a cheap way to get sentiment and shares headed in the right direction, but it is what it is.

Analysts on average expect Ford to report current-quarter earnings at 26 cents a share. Three months ago, they were looking for 41 cents a share, according to a survey by Thomson Reuters.

The current year has been marked down to earnings-per-share of $1.87 from $2.08, and next year dropped to $1.88 from $2.12. Wall Street doesn’t want to be caught flat-footed again, and that’s to Ford’s advantage.

The Bottom Line on F Stock

Seaport Global Securities analyst Michael Ward sums up his buy call on F stock like this:

“Underlying demand indicators suggest total sales will remain at historically high levels over the next few years. We believe that Ford is well positioned to generate record levels of profitability. We believe Ford’s improved cost position, de-risked balance sheet and ability to profitably endure a downturn will eventually result in an expanded multiple.”

With a yield of 5%, Ford deserves more respect in a world of ultra-low rates. A patient value investor is paid pretty well while waiting for price appreciation. And although it may take a good long while, F stock won’t stay this cheap forever.

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

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