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No one talks about Ford (F)'s impressive dividend, why is that? Sure the stock might be a great turnaround story in the auto industry, but it has an impressive dividend yield at 3.2%. Ford is a value stock and a bet on the global economic recovery. Remember that during the financial crisis of 2008-2009, Ford Motor was the only US auto company that didn't take a bailout. The company has one of the strongest balance sheets among the big three US auto companies.

Auto Sales Improving

For the month of February, Ford's auto sales were up 9% over last year. Sales gains were made with the Explorer and Escape SUVs, Fusion cars, and the F-Series trucks. The strength in the Ford brand gave the company its best February sales in 6 years. The one laggard among the Ford brands is the Lincoln division. Sales of the Lincoln brand continue to weaken with sales dropping 29%. Ford CEO Alan Mulally knows Lincoln is a problem and is determined to fix the beleaguered brand. A turnaround in Lincoln would give further upside for the stock. Luckily, the Ford brand more than makes up for any weakness from Lincoln (see how Ford is turning around Lincoln).

Strong Financials

Ford Motor has over $24.1 billion in cash on its balance sheet and a market cap of only $50.4 billion. The company has a forward P/E of 7.66 and an operating margin of 4.97%, which is very good for the auto sector. That operating margin looks set to improve with the One Ford Manufacturing Initiative.

This will allow the company to produce several models utilizing the same platform. The potential savings from this is enormous. Ford Motor also retained its Ford Motor Credit company through the financial crisis. Other auto companies had to selloff their financing arms to raise cash while Ford didn't. Ford Motor Credit is a cash cow and allows the company to finance its own auto sales. In looking at the company from a dividend investor's perspective, the company's cash hoard of over $24 billion would allow it to pay dividends for 126 straight quarters. The Ford family wants the dividends to continue to fund their lifestyle. The Ford family doesn't want to sell any stock as that would reduce their holdings and control of the company. If the global economic recovery continues, the dividend could actually increase and the Ford family would greatly welcome that. Earnings at Ford for 2013 are forecast to be $1.42 per share and $1.70 per share for 2014. The current dividend of 40 cents per share is more than covered by earnings without the company to tap its cash hoard. If earnings continue at this pace, look for the dividend to increase.

Valuation

Ford is one of the cheapest stocks in the industry.

Price to Earnings

  • Ford 9x
  • GM (GM) 9.5x
  • Toyota (TM) 19x
  • Honda (HMC) 17x

What's more is that Ford has the ability to generate solid returns for investors, with above-average EBITDA margin and return on equity...

EBITDA Margin

  • Ford 11.6%
  • GM 4.2%
  • Toyota 9.8%
  • Honda 11.2%

Return on Equity

  • Ford 33%
  • GM 18%
  • Toyota 7%
  • Honda 8%

Outlook

Ford Motor has reiterated a strong outlook for 2013. The company sees future growth coming from emerging markets, particularly China, India, Indonesia and Brazil (read more about Ford's China presence). Most analysts are forecasting sales growth for 2013-2014 at between and 5 and 6 percent. In terms of Europe, Ford is "cautiously optimistic" going forward. The company will launch its EcoSport compact SUV later this year. In Ford's sales forecast, they have forecast European sales at the low end of their forecasts. Currently any economic recovery in Europe is not priced into the stock. A pickup in demand for Europe would be a bullish catalyst for the stock. In the US, a lot will depend on the housing and employment recovery. The US recovery has been slow and gradual. As long as the current pace continues, US manufacturers like Ford will continue to perform as consumers seek to upgrade from their current automobile. The average automobile on the road in the US is over 11 years old. There's a large customer base waiting to buy a new car.

An improving economy will allow that to happen and increase Ford's sales. Ford stock closed on Tuesday at $12.87, up 12 cents on the day. The average analyst's projection for the stock this year is $15.14. Of the 21 analysts that follow the stock, 4 have it rated as a Strong Buy, 6 a Buy, 9 a Hold, 1 an Under-perform and 1 a Sell. We agree with the Buy and Hold analysts. The 3.2% dividend yield is a great way to hold the stock and wait for the continued recovery in the auto sector and the global economy in general. The dividend payout is only 13.5% of trailing twelve month earnings. The only other major auto company paying a dividend is Toyota, but its dividend yield is only 1.4% (read more about why Ford is a dividend growth stock).

Source: Ford: Great Dividend Potential