When I last wrote about Ford (NYSE:F) on May 27, the stock was trading at $6.03. I wrote that F stock is worth $8.25 per share based on its historical dividend yield. I still believe this, and think Ford’s cash flow will eventually support it.
I argued that the dividend will return to 15 cents per quarter once Ford can afford it again. I expect that the increase in cash flow sometime in 2021 will be sufficient to cover the dividend.
My new estimate is for $8.29 per share for F stock. This is based on Seeking Alpha‘s estimate that the average dividend yield over the past four years is 7.24%.
Therefore, 60 cents per share divided by 7.24% results in a price target of $8.29. That represents a potential gain of 20% above Friday’s close at $6.88.
Can Ford Afford the Dividend?
Analysts (19) polled by Yahoo! Finance estimate that Ford will make 51 cents per share in 2021. Seeking Alpha has a poll of 19 analysts who estimate 2021 earnings will be 59 cents per share. That is almost equal to the 60-cent dividend from the past.
Even if Ford makes just 45 cents per share, this works out to about $1.78 billion. Moreover, its free cash flow will be much higher than this, about $3 billion. That is because free cash flow conversion is usually 66% higher than net income. For example, in the first quarter of 2019, Ford made $1.91 billion in free cash flow, 66% more than its net income of $1.15 billion.
Ford’s 60-cent quarterly dividend costs about $2.4 billion annually. This will be less than the $3 billion in free cash flow from EPS of 45 cents per share in 2021. So, yes, Ford should be to afford the dividend sometime in 2021.
What Analysts Say About Ford
Ford will report its Q2 earnings on Thursday. Analysts estimate a difficult quarter, negative $1.17 per share to negative $1.21. Revenue estimates range from $15.37 billion to $15.95 billion.
Last year in Q2, Ford made sales of $35.76 billion. This is already discounted in the stock price. What is important is what lies ahead. Ford was hoarding its cash, cut its dividend, and is hunkered down. It has not yet provided any forecast for 2020. At one point, it had no factories open.
The company is now at 96% of U.S. factory production capacity, according to Ford’s COO in a recent interview with Bloomberg News.
The company recently upgraded its extremely popular F-150 truck with a lot of new features. This is the first big upgrade in the truck in the past five years. Some of the features are an all-new power train, a hybrid gasoline-electric version, an on-board generator, 700 miles per tank, a 12-inch screen, a fully flat seat, over-the-air updates and tailgate productivity gadgets.
So far, the company does not have a fully electric F-150. Ford claims it will have one within the next 24 months, but it may have to move faster than that. Some of Ford’s competitors, like Nikola (NASDAQ:NKLA) with its new Badger and Tesla (NASDAQ:TSLA) with its Cybertruck are coming out with EV pickup trucks.
What to Do With F Stock
Let’s get practical. Even if Ford were to cut its dividend by one-third to, say, 40 cents per share once it resumes, the stock would likely rise.
I suspect the dividend yield would likely range between 5% and 6%. That is because a dividend yield of over 6% usually indicates there is some question about whether it is sustainable or could be cut.
Therefore the implied value of a 5.5% dividend yield with a 40-cent dividend is $7.27 per share. That is calculated by dividing 40 cents by 5.5% which equals $7.27. In fact, 40 cents at a 5% yield produces a target price of $8 per share.
So, just as I argued in my last article, it’s probably better to buy F stock now, before it reinstates its dividend. The upside is at least 7% if the price rises to $7.27, or 16% if the stock rises to $8 per share with a 40 cent per share annual dividend.
Moreover, if the annual dividend stays at 60 cents and the average yield is 7.24%, it is worth $8.29, 20% above today’s price.
Therefore, looking forward, despite the lack of a dividend, Ford stock looks like a good bargain.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide, which you can review here.
