Time for Investors to Take Advantage of a Bargain in Ford Stock

Ford stock has a low P/E and high dividend yield

By Will Healy, InvestorPlace Contributor

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Ford (NYSE:F) has lost 10% of its value over the last month. This leaves many asking the question, “Why is Ford stock so low?” Automakers face continuing struggles on many fronts. The economy, interest rates, labor issues, supply issues and material costs stand as many factors that affect the stock price of Ford.

Despite the challenges, instead of wondering about Ford’s stock price, perhaps investors should be asking, “How should I react to this development?”

Similar Challenges for Ford and Its Peers

Such a drop in Ford stock rarely occurs in so short of a time. Given today’s geopolitical environment, most will say tariff threats are the reason why Ford stock so low.

While tariffs may appear to protect jobs, the higher steel and aluminum prices that come with tariffs will lower car demand. Investors should also note that General Motors (NYSE:GM) and Fiat Chrysler (NYSE:FCAU) have seen similar moves in their stock prices.

Moreover, China and other countries can retaliate with tariffs of their own. This can reduce demand for Ford cars in overseas markets. Furthermore, tariffs will nudge foreign car firms such as Toyota (NYSE:TM) and Honda (NYSE:HMC) to avoid duties by producing even more cars in the U.S. Due to these challenges, most would understand the selling in Ford stock.

The company will pay out at least $299.1 million to resolve a lawsuit involving 6 million Takata airbag inflators. Also, Ford just issued a recall on previous models of the Ford Fusion and Ford Escape. Issues with shifter cable bushing affect about 550,000 of these vehicles.

While both issues sound significant, car companies deal with such defects on a regular basis. Such an occurrence will likely only have a short-term effect on the stock.

“Why?” Is the Wrong Question

In truth, many factors from a wide array of sources drive Ford stock. However, with the stock lower, perhaps investors should stop asking “Why?” and simply take advantage of a bargain.

For one, the tariffs will likely not remain long term. U.S. industries have long suffered as lower tariffs were met with high tariffs abroad. The U.S. threat of retaliation will likely abate as countries agree to end the trade wars.

While Ford stockholders wait for the trade wars to die down, they can enjoy a dividend yield exceeding 5.5%. Rarely does a stock trading at under $11 per share pay an annual dividend as high as 60 cents per share.

Although a dividend reduction remains possible, the last cut occurred in 2006 when Ford suspended dividend payments until 2012. However, the current dividend stands at about triple the S&P 500 average dividend. Even with a dividend cut, investors will still likely enjoy a high cash return on these payouts.

The stock also makes sense from a valuation standpoint. Its current price-to-earnings (P/E) ratio stands at 5.5. With a predicted decline in earnings, that multiple will rise modestly.

Still, analysts forecast profits will be 10% higher by 2020. One analyst forecasts a profit of $2.07 by 2021, up from the $1.54 per share expected this year. These predictions probably assume that tariffs will come back down. Assuming tariffs only last for a short time, both the stock price and the dividend will likely rise along with these values.

The Bottom Line on Ford Stock

Instead of asking, “Why is Ford stock so low,” investors should ask, “How can I benefit?” The looming trade war and the effects of tariffs on steel and aluminum prices weigh on Ford stock.

However, the drop in the stock price has pushed the dividend yield north of 5.5%. The high dividend along with the 5.5 P/E ratio should attract bargain hunters. If a rising stock price does not benefit stockholders, the dividend will.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


Article printed from InvestorPlace Media, https://investorplace.com/2018/07/time-for-investors-to-take-advantage-of-a-bargain-in-ford-stock/.

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