I have been consistently positive on Ford Motor Company (NYSE:F) and its ability to restore the dividend next year. Ford stock has moved up over 42% in the last six months, and more since my articles at the end of May and July.
But the share still have much higher to go, possibly as much as 50%. This article will show how I come up with that estimate.
Analysts have been consistently raising their earnings estimates for Ford. For example, there have been 17 upward revisions and no down revisions by analysts for Ford’s earnings per share (EPS). In fact, there are now 24 analysts covering the stock, up from just 18 a month ago, according to Refinitiv data.
Ford Stock Earnings Estimates and Dividend Yield
Moreover, the average EPS estimate for 2021 (2020 is a write-off for most analysts) is $1.02 and $1.35 for 2022. That puts Ford stock, at $9.34 as of Dec. 4, on a forward multiple of 9.16 times for 2021 and just 6.9x for 2022.
More importantly, these levels of earnings are high enough for Ford to restore its dividend at some point. The quarterly dividend had been flat at 15 cents per quarter for more than two years, although annual special dividends were cut. But after the January 2020 payment, Ford axed the quarterly payout.
There is still no indication when the car maker will restore the 60 cents annual dividend. For example, during a presentation at Goldman Sachs on Dec. 4, the subject of capital return to shareholders did not even come up. And, even if the dividend is restored, there is no guarantee it will be set at the previous 15 cents quarterly rate.
All of this comes as Ford has big plans to scale up its plants to begin producing electric vehicles, at least according to one UBS analyst. Patrick Hummel called Ford a “self-help” story, although it will have competition from other EV makers in its cash cow pickup business. Therefore, this might leave little room for a restored dividend at the same level.
What a Dividend Would Be Worth
We can make an easy estimate where Ford stock could end up using simple arithmetic. For example, let’s assume that Ford restores its quarter quarterly dividend in the middle of 2021 or thereabouts.
However, instead of 15 cents per share, let’s lower that assumption, to be conservative. Let’s say that the dividend is reinstated to 10 cents per quarter, or 40 cents annually.
Now, where will the market take the stock with that dividend? I believe that it will view this as a positive element, as long as Ford is making progress on the EV front. There is simply no question that most vehicles will be electric within the next 15 to 20 years, at least on the new sales side. So, if the company can return capital and invest in EV plants and retain its market share and brand as competitors increase, watch out.
There is a good chance the yield can reach between 3% and 4% annually. Here is how that works out: If we dividend 40 cents by 4.0%, the annual price target would be $10 per share. That represents a potential gain of 7% above the recent price of $9.34.
However, if we divide 40 cents by a 3.0% dividend yield, we derive $13.33 per share as a target. This is 42.8% above today’s price. In other words, Ford stock is likely worth between 7% and 42.8% more. That works out to at least 25% more on average, or $11.66.
What To Do With Ford Stock
Barron’s senior writer Al Root recently wrote that Ford could be “fixed” and the stock could double. But that was when Ford stock was lower. However, they cite analysts who believe the company could have earnings power between $2.50 and $3.00 per share if its margins improve.
Root believes that the stock could eventually attain double-digit earnings multiples, especially if the company is successful in going electric. That implies the stock could hit a price between $15 and $20 per share.
A lot has to go right before then, including playing catch up in the electrification process of its best selling trucks and vans. I like to use probabilities. Let’s there is a 30% chance it can reach $18 within the next two years and a 50% chance it moves to the high end of my target range of $13.33 per share. That leaves a 20% likelihood Ford stock stays where it is now at $9.34.
Therefore, the expected price using these probability estimates is $13.96 per share or 50% above today’s price.
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.
