Ford (NYSE:F) shares dove in Friday trading following President Trump’s surprise announcement of new tariffs on Mexican goods. Though Ford lacks the large Mexican presence of its archrival GM (NYSE:GM), concerns about supply chains rattled investors in Ford stock and its peers.
While this selloff will probably become a buying opportunity, traders should hold off in the near-term as the impact becomes fully understood.
Tariffs Could Directly Affect Electric Car Production
In an unexpected move, President Trump slapped a 5% tariff on all goods coming from Mexico. Tariffs will begin on June 10 and will gradually increase until Mexico has done enough in the eyes of the Trump Administration to curb illegal immigration. News of these duties sent the market sharply lower, hitting Ford stock and auto stocks across the board.
For the first four months of 2019, Ford produced 20,234 vehicles in Mexico. This represents a 14.7% decline in Mexican production from the same quarter last year. That also makes up only a small percentage of production as Ford sold 590,249 vehicles in North America in the first three months of the year.
Nonetheless, this could cause issues for Ford stock as the company had expected to produce more cars in Mexico, even as it cut overall production. The company has planned to build its battery-electric crossover vehicle at its Cuautitlan, Mexico plant. This means a change from its original plan to produce the car at its Flat Rock, Michigan facility.
Moreover, Ford has lagged both long-time rivals and upstarts such as Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) in electric vehicle production. Now, with that production happening in a country directly targeted by tariffs, worries become magnified.
Most of the Concern Involves the Supply Chain
However, the more significant concern might come from integrated supply chains. According to Liz Ann Sanders of Charles Schwab (NYSE:SCHW), two-thirds of the imports between the U.S. and Mexico take place intra-company. Goods can also cross the border multiple times. Country wide, the Wilson Center says that 4.9 million U.S. jobs and more than $500 billion in economic activity depend on trade with Mexico.
From an investor standpoint, traders now have to wonder if Ford stock can continue to recover as many had predicted. Even after the Friday swoon, Ford stock has risen by more than 25% since late December. However, that comes after the F stock lost nearly half of its value over a five-year period. That brought its multiple to just under seven times forward earnings. Given that low P/E ratio, I see it retesting the December lows only in a worst case scenario. Still, supply chain concerns may limit the upside for now.
In the meantime, long-time holders of Ford stock can take solace in the dividend. The Ford stock price has fallen back below $9.50 per share. With the annual payout currently at 60 cents per share, this takes the yield to around 6.4%. Yes, it fell from last year’s 73 cents per share. However, with the yield at more than triple the S&P 500 average, that still can bring investors substantial cash flows.
The Bottom Line on Ford Stock
The tariff on Mexican imports will delay but probably not deny the long-awaited recovery of Ford stock.
In the near term, new tariffs on goods from Mexico bring a great deal of uncertainty for Ford. The status of Ford’s push into electric vehicles comes into question. More importantly, owners of Ford stock now have to wonder what effects the duties will have on Ford’s supply chain.
Investors who have seen Ford stock slide for five years will face further delays in the stock’s recovery. With the 6.4% dividend yield, long-term holders of Ford stock should probably ride out the trade dispute. Even if the company cuts the payout again next year, it will remain well above S&P averages.
Prospective buyers face a more uncertain path. Six months from now, we do not know if this episode will be in the distant past or if consumers will face even higher tariffs on Mexican goods.
Admittedly, the low multiple, the payout, and the recent history of Ford stock lessen the risk of buying now. However, until traders know more about the effects of tariffs on Ford’s supply chain, new buyers should probably wait.
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.