Where’s the one place you shouldn’t invest when a recession is on its way? Cyclicals. Even more specifically, the automakers are definitely a group that should be avoided during economic downturns. That’s exactly why Ford (NYSE:F), General Motors (NYSE:GM) and others are getting hammered right now.
Ford’s shares are now down 52% from their February highs. That’s slightly worse than GM’s performance, as its stock is down 41% from its February high. Of course, the most obvious question is: are we heading for a recession?
Technically speaking, a recession is likely to occur. But there’s a big difference between a quick rebound of the economy and a prolonged slump.
Sizing Up Ford
Unfortunately for the auto industry, the sector began experiencing a slowdown before most other U.S. firms. When the coronavirus started wreaking havoc on China in late January, the auto sector’s slowdown began. Its downturn intensified in February.
The sector’s retail sales and auto shipments plummeted. Given the magnitude of America’s current situation, that should come as little surprise. As the coronavirus from China has started spreading throughout the U.S. this month, we’re seeing the same type of closures and lockdowns that China experienced earlier in the year.
For Ford, GM and others, the current situation is creating immense financial concerns. These stocks never really recovered from the Great Recession. GM is down over 40% from its 2010 IPO price of 2010, while F stock has done even worse, down more than 60% over the last decade.
I’m not saying Ford will go belly up, but its situation is far from ideal. Automakers run capital-intensive businesses on thin margins. Ford has been shifting to higher-margin products, moving away from cars and toward SUVs and trucks. However, when the global economy pivots on a dime, its situation will be worrisome.
Will the company’s dividend be axed due to the economic downturn ?
Ford’s Dividend
Currently, F stock has a dividend yield of about 13.3%. That’s getting into red-flag territory, as the double-digit yield warns investors that Ford may not be able to maintain that payout. By comparison, GM yields about 9%, while Fiat Chrysler (NYSE:FCAU) pays out 5.4%.
At 60 cents per share, Ford’s annual dividend amounts to roughly $2.39 billion of dividend payments. With management’s most recent outlook for adjusted free cash flow of $2.4 billion to $3.4 billion, Ford should have enough free cash flow to pay the dividend . That’s very good.
But is the dividend sustainable? That’s where the economic issues come into play. If the economy is humming along in June and consumers are strong, then Ford and its dividend will likely be fine. If the economy is still faltering and consumers are slow to regain momentum, Ford may have a problem. And of course, this is all predicated on management’s prior free cash flow outlook, which may very well change sometime soon.
In early March, Morgan Stanley analyst Adam Jonas examined Ford’s dividend. He sees “great value” in the dividend in the short-term, although the payout has done little to help buoy the share price. However, he did note that if the dividend gets cut, the stock could capitulate.
Final Thoughts on F Stock
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The problem with Ford is that it doesn’t have any momentum. Analysts’ average estimate calls for full-year sales of $141.2 billion, down 1.7% year-over-year. That figure will absolutely come down as we get an idea of just how bad the economic situation is. In any event, the economy will likely further weigh on the company’s earnings
Here’s the problem, though: The market hates uncertainty. Right now, there’s nothing more uncertain than how COVID-19 will pan out, how long it will last or how many it will kill.
Some businesses — like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) — will be fine. People will still search for things online, companies will still buy ads and the company still has a ton of cash.
For Ford, the implications are more uncertain, making its 2020 sales and the stability of the dividend difficult to determine. That uncertainty is being reflected in the company’s share price. I have said in the past that, once F stock lost its uptrend support, investors needed to keep an eye on the $8.50 level.
Of course, I didn’t expect this type of breakdown. A glance at the weekly chart shown above reflects that, once $7 gave way, investors still could have gotten out of the way and saved $2 per share. At this point, we need to see F stock reclaim the $5 mark. Perhaps after the company cuts its dividend, we will see a capitulation of the stock price, and the shares will fall below $4. If that happens, look to see if Ford can reclaim $5.
Either way, though, this stock may very well be too risky for many investors. That’s understandable.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long GOOGL.
