Ford Motor Company (NYSE:F) has lulled many observers to sleep. F stock has been one of the most subdued out of the major industrial firms in the country over the past five years. The S&P 500 Index has gained almost 10 times more than the carmaker’s shares in that period as they unfailingly traded in a rather narrow range between $11 and $17.
Despite a sharp rebound in American auto demand to record highs in 2016, F stock failed to follow the trend. With the auto industry starting to slow in 2017, F stock has now slumped back to the bottom of that five-year range. Is the next move back up toward $15, or a plunge out of its range back into the single digits? Here are the reasons that favor each outcome.
F Stock Cons
Auto Market Slowing: Through August of this year, U.S. auto sales had declined eight months in a row. Replacement demand for hurricane-flooded vehicles snapped the losing streak for the moment, however the trend is clear.
U.S. auto demand appears to have peaked in 2016, and we’re now set for several years of declines. The plunge in the value of resale vehicles is particularly troubling, as it will act as a stiff headwind for margins on new vehicles for many quarters to come.
It also seems likely that auto lending finance will become tighter after years of unprecedented looseness. Rising interest rates are an underestimated headwind for the automakers, as their own substantial debt loads cost more to service, while their customers must choose smaller principal payments to offset rising interest.
China Problems: China is one of the world’s most important auto markets. In fact, it’s much larger than the U.S. market; Chinese consumers buy ~28 million autos a year while their American counterparts purchase 17.5 million.
Ford used to have a strong position in the Chinese market. But lately it is slipping. Some of this is for understandable reasons, Ford hasn’t launched many must-have vehicles in the Chinese market recently. However, it’s the rise of domestic Chinese automakers that is the real problem. Ford has been reluctant to cut prices. Efforts to protect margins has led to major sales losses to the local upstarts.
July’s Chinese sales data put this problem in stark relief. In July 2016, Ford sold 67,000 vehicles in China. This plummeted 29% to just 48,000 for the same month this year.
Strong Dollar: Added to the previous point, the strong U.S. dollar remains a significant headwind. Ford has a tremendously successful international business. That, however, comes with the drawback that when the dollar is strong, their international profits slide.
In 2014-2015, the dollar enjoyed its largest rally since the financial crisis, surging 25%. Since then, the currency has traded largely sideways, remaining at an elevated value against key trading partners, including China, Europe, and Japan. The dollar finally appeared to be ready for a slide earlier this year. However, the currency bottomed at support in September, and has steadily rallied again. This is bad news for F stock, which had appeared ready to finally benefit from a normalizing currency environment.
F Stock Pros
Strong Dividend Pick: Ford has one clear advantage for investors as compared to General Motors Company (NYSE:GM). F stock pays a 4.9% dividend regularly. GM stock, by contrast, offers a significantly smaller 3.65% yield at present. GM has been using its excess cash to buy back stock instead of focusing on dividends. That was an effective strategy when GM stock was lingering in the low 30s. However, the bang for the buck drops as GM shares rise.
Ford, on the other hand, rewards its shareholders immediately with dividends. Not only is Ford paying an almost-5% dividend, it supplements these regular dividends with an annual special dividend. In this way, F stock owners get their reliable 5% a year payment and they also receive a special payment on top of that tied to how strong each year’s profits come in. F stock paid an extra 25 cents last year, and 5 cents this year. This mechanism allows stockholders to participate in the company’s windfall profit years without worrying about a dividend cut in the down times.
Surging Truck Demand: As I mentioned in my recent General Motors article, GM is looking to step up its focus on SUVs and trucks. That’s not only because smaller cars are seeing declining demand at the moment, but also because trucks are really hot right now.
In a strong economy with relatively low gas prices, SUV and truck demand tends to ramp up. And if you want to benefit from truck demand, what better option than F stock? Ford’s latest sales report shows the boom in progress. The F-150 sold 75,974 vehicles in October. That’s the best showing for the F-150 since 2004. With an average selling price exceeding $55,000, F-150s are a huge profit center for Ford, and speak well to the company’s prospects for 2018.
Relative Value: The Ford stock price has hardly awed anyone lately. The stock is up just 2% year-to-date amid huge gains for the market as a whole.
And since the 2014 peak, the stock is off 30% not counting dividends. GM stock, by contrast, is 20% higher for the year and just recently made new five-year highs. For another comparison point, consider Toyota Motors Company (ADR) (NYSE:TM). Toyota is up 50% over the past five years and a respectable 8% year-to-date.
Verdict on F Stock
It’s not hard to understand why F stock is back down to $12 now. The company failed to capitalize fully on the years of peak auto sales. Why expect Ford to do better as U.S. car sales slide? Throw in unfavorable international conditions and particular worries in China, and the company is far from firing on all cylinders.
That said, the company’s core operations remain well-managed and highly profitable. Trucks are the American market’s hottest segment now, and Ford has the best product in the category. And Ford’s unusual dividend policy rewards shareholders with big payouts even if the stock continues passing time in the $12 range.
At the time of this writing, Ian Bezek didn’t hold positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.