Ford Motor Company (NYSE:F) is a controversial investment at the moment. Ford stock looks cheap, and it pays a massive dividend for an industrial firm, but that’s not the whole story.
The bears have a powerful argument against Ford stock. They talk of threats from electric vehicles, Ford’s huge debt load, and what seems to be the top of the automotive cycle.
Bulls make an equally compelling argument for Ford stock.
But which is most relevant to the investment case for Ford stock today?
Ford Stock Cons
Tesla Pick-Up Truck: Elon Musk has long hinted that Tesla Inc (NASDAQ:TSLA) would eventually make an electric pick-up. However, it hadn’t appeared to be on the front burner. Earlier this month, though, that changed, as Musk suggested that Tesla could make a pick-up based on its pre-existing semi technology.
This is potentially awful news for Ford’s F-150. The F-150 has been America’s top-selling truck for the past 40 years. Ford sold more than 800,000 of these vehicles last year alone. In 2015, Automotive News estimated that each F-150 produces more than $13,000 in gross profit. That suggests that Ford earns more than $10 billion a year in gross profit off its F-150s — nearly half of the company’s entire gross profit. Any dent in this segment from a potential Tesla competitor could be a dagger to F stock.
Too Much Debt: Automakers are known for their high leverage. General Motors Company (NYSE:GM) infamously went bankrupt during the financial crisis. The government had to bail out that firm to avoid widespread job losses. Ford avoided bankruptcy, but it was on the brink. F stock lost more than 80% of its value during the great financial crisis.
I fear the same sort of thing could happen during the next recession. Ford had slashed its long-term debt load from $141 billion in 2007 to $59 billion in 2011. However, since then, Ford has let the debt pile back up. Its long-term loans topped $95 billion again recently. The debt may seem sustainable during the current good times for the economy and car sales, but things can reverse rapidly. Ford’s BBB credit rating is hardly enough to inspire profound confidence in the balance sheet.
Top of the Car Cycle: After setting records for US auto sales last year, the industry has gone cold. Moody’s (NYSE:MCO) recently forecast that the industry will see sales decline by 3.6% for 2017 as a whole. And the recent hurricanes won’t likely help. Texas alone accounts for almost a tenth of American auto sales, and sales have plunged in the wake of Harvey.
That said, in the long run, the destruction from the hurricanes may clear some of the excess inventory in the used auto market. A sustained drop in used car prices has created increasing competition for new vehicle sales. In any case, though, Moody’s suggests that the weakness in the auto sector will carry on for as much as the next 18 months. That’s not good for Ford stock in any way.
Ford Stock Pros
Huge Dividend: The main appeal of F stock for many investors is its unusually high dividend. Normally, you have to invest in more exotic stocks such as REITs, MLPs or BDCs to get high dividends. However, Ford offers the opportunity to get a juicy yield from a classic American powerhouse brand.
Ford’s current 60-cent-per-year dividend adds up to a 5.1% dividend yield. On the S&P 500, only 14 companies offer a 5% or greater dividend. And Ford is the only industrial company that fits the bill. On the downside, Ford isn’t increasing its dividend at the moment. But at a 5%+ starting yield, along with a small share buyback, Ford is doing plenty to return cash to its shareholders.
Trump Upside: There’s great uncertainty regarding American trade policy going forward, so take this pro merely as a speculative possibility. However, the Trump administration continues to seem set on reworking NAFTA in some way that may aid domestic automakers. Last week, Commerce Secretary Wilbur Ross kept the issue in focus, saying new rules will be needed to ensure that the US portion of value-added in manufacturing rebounds.
Ironically, the election of Trump has bolstered the Mexican auto industry. That’s due to the dramatic decline in the Mexican Peso immediately following the vote, which made Mexico more competitive in comparison with the US and Canada. For the year so far, Mexican production is up 10%, despite the decline in the health of the US auto market. This will give more ammunition to Trump and his staff in taking a harder line on imports in future negotiations. There is risk that production would merely go to Asia in the longer-term. That said, any sort of crackdown would probably cause a big pop in F stock, at least in the near-term.
Cheap Stock: Ford stock hasn’t been a star performer in recent years. In fact, the stock hasn’t even come close to hitting its post-recession highs. In 2011, Ford stock reached $18. It would hit $17 several times in future years, but has since slumped, struggling to stay much above $10 lately.
This leaves Ford with 12 times trailing earnings. And, if you believe the analysts, Ford’s earnings will rise nearly 50% next year, taking the forward PE to just 8. It’s also trading at just 0.3 times sales, and less than 6 times cash flow. This has resulted in the high dividend yield discussed above. If you believe the company’s debt load is manageable, the stock looks cheap indeed.
Conclusion
Unfortunately, there is plenty of reason to question the company’s balance sheet. Ford was way too highly levered heading into the last recession and the stock crashed into the pennies as a result. Ford’s current direction, piling up debt as car sales peak and the economic recovery wears out, is deeply concerning.
On the other hand, Ford stock is cheap. If you want to take a position and collect the dividend, I can see the appeal. But keep a close eye on the auto industry’s trajectory and be prepared to bail if the current slowdown deepens.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
