Ford (NYSE:F) continues to look undervalued, mainly because of a potential return of its dividend next year. And with a new CEO coming later this year, F stock is definitely one to watch for a comeback.
In my last article on F stock, I wrote then that it might pay a 15-cents-per-share quarterly dividend sometime next year. This will be half of its prior dividend but will give the stock a very high 8.7% dividend yield. Of course, by that time F stock will likely be much higher. Its average four-year dividend yield has been 7.14%. That implies the stock could rise to $8.40 per share or 22% above today’s price.
There are other catalysts that likely will help move the stock higher.
Ford Is Revamping Strategy and Management
For example, Ford plans on producing an EV version of its popular F-150 truck. Ford plans on shutting an auto plant in Michigan next month to prepare for a redesigned F-150. In addition, it plans on building a new facility at a Dearborn plant to make an EV version of the F-150.
A new CEO is taking the reins in October. Jim Hackett, the present CEO, 65, and a Ford lifer, unexpectedly agreed to step down on Aug. 4. He has been there only since 2007. Barron’s quoted sources as saying that Wall Street didn’t like him. Ford’s net margins are still half of General Motors (NYSE:GM).
Jim Farley, presently COO will take over. He may have already effectively taken over. On Sep. 2, Ford said it was going to reduce its salaried force by offering early retirement to over 1,400 people. Barron’s says the new CEO wants to “streamline operations and get profit margins up.”
The company did not say how much money the cuts would generate. The company employs 190,000 so this number of cuts probably won’t make a large dent in its plans to reduce $11 billion over the next several years. According to CNBC, the new COO says making 10% profit margins remains his priority.
He also will likely focus on getting the company to move solidly into electric vehicles. In effect, they are playing catch-up with Tesla (NASDAQ:TSLA) with its Cybertruck model coming out next year.
This is despite having invested $500 million last year in an EV truck startup rival, Rivian. Ford also partnered last July with Volkswagen (OTCMKTS:VWAGY) in an autonomous driving technology company called Argo AI, based in Pittsburgh.
Ford’s Finances
In its latest quarter, Ford made $1.1 billion in net income on revenue of $19.4 billion. That represents a margin of just 5.7%. Therefore, the new CEO needs to increase the margin by almost 100%.
Moreover, the net income that it did make included a $3.5 billion revaluation of its stake in Argo AI. So, without that, on an operating basis, its net income was negative. In fact, its free cash flow in Q2 was negative $5.3 billion.
Ford has $39 billion in cash, so it can afford to have a few quarters of negative FCF. But if this lasts into next year, the company could be in trouble and might have to raise more capital.
Analysts polled by Yahoo! Finance estimate that in 2021 Ford will make 71 cents per share. That is a turnaround from expected losses this year. They also expect 22% higher revenue, rising to $138.7 billion.
In effect, the company will make more than enough to restore a 50% reduction in its prior dividend or 60 cents per share.
What To Do With F Stock
Investors will likely see Ford as a bargain stock by Q1 or earlier next year. By then, it will be clear if it can return to being a dividend-paying company. Assuming that occurs, look for F stock to rise at least 22% to $8.40 or higher in the next six months or so.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
