What Should Your Expectations Be If You're Looking To Invest In Ford?

| About: Ford Motor (F)

Summary

Why isn't Ford taking steps to increase their stock price like GM just did?

Why didn't they increase their regular dividend?

Does the 'special' dividend reflect a lack of confidence by management?

Ford Ford's stock keeps going through the floor. Should I buy it or if I already own it should I sell? These are the two questions facing Ford investors and current shareholders.

In order to answer the question, one needs to make a determination as to "why" they want to consider owning stock in the company. This question should be asked regarding any stock purchase decision whether it's Ford or any other company. There needs to be a rationale as to why you want to own stock in a company (and "to make a profit" is too broad of an answer). We all want to make a profit, but there are myriad ways of doing that. You can make it from dividends, short term capital gains/trading gains, long-term capital gains, shorting the stock, buying and selling put and call options, etc.

So if you've decided you're a long-term investor and not one who has the time or inclination to be a trader or delve into options, why would you want to buy F? Effectively, what should you be looking for from owning its stock and what should you expect once you own it?

I'll tackle the first question now and the second a little later in the article. You want to own Ford for the dividend income first and foremost. You may make some money on a trade at its current price, but this isn't the stock I would buy if I was looking for some quick capital gains. As I write this, assuming that there is no increase in the regular dividend over the next 4 quarters, you should expect to earn a yield on cost of about 7.1%. About 70% of this dividend (approx a 5.0% return) comes from the regular dividend ($0.60/sh) and the other 30% of the dividend (approx a 2.1% return) comes from the recently declared special dividend ($0.25/sh).

For a large S&P 500 stock, that is a pretty hefty dividend. I also consider the dividend pretty safe because 30% of the amount comes from the special dividend, which is previously earned money. The $1B in cash this dividend represents was earned in 2015. There are no forecasts, questions, estimates, macro perspectives, etc. to be worried about regarding this $1B. As to the remainder of the dividend ($.60/sh), that amounts to about $2.34B. The 2016 mean estimate for Ford based on 21 analysts' projections is $1.94/sh with a high/low estimate of $2.30/$1.65. That is about a 30% payout (36% if based on the lowest of the 21 estimates). That is a reasonably secure dividend to me.

So why might have Ford decided to declare a special dividend rather than increase its regular dividend as GM did? To me, this has to do with what I perceive Ford to be vs. other companies. While it is certainly a publicly traded company, it operates more like a privately held one. As a Chief Financial Officer for the past few decades for privately held companies and ultra net worth individuals, it is a pattern with which I am very familiar. First you need to understand F's ownership structure. In addition to the Class A shares that you and I buy, the Ford family owns 40% of the voting stock of the company through their ownership of separate Class B shares. Regardless of the amount of Class A shares outstanding, the Ford family is entitled to elect 40% of the Board of Directors, thereby keeping effective control of the company. That allows them to not really be that concerned about the wants of the Class A shareholders, very much like a privately held company where the owners only need to be concerned about themselves and their company.

I highlighted "and their company" for a reason. In a privately held company, the owners' main concern is not only the long-term profitability of the company, but its long-term sustainability and success as well. Don't underestimate this last facet. The Ford family's name is on every automobile and "legacy" is a very important factor to them. After almost seeing its legacy end 8 years ago (remember that they had to hock the "blue oval" as part of the loan that Alan Mulally had the foresight to obtain in order to keep Ford from following GM and Chrysler into bankruptcy), I don't believe the family is going to do anything that might put Ford into that position again. Also remember that they had to eliminate the dividend at that time as well. Again, something the family along with the current management is not willing to risk in the future. Hence, we get a special dividend out ofalready earned profits and keep a regular dividend at a reasonably low payout ratio so they have a solid floor under it and don't need to be concerned about reducing or eliminating it in the future. They may increase it in the future, but be certain that it will be to a level that they believe is sustainable, safe, and essentially immune to reduction or elimination based on the company's cyclicality or macro perspectives.

So how does a privately held company operate differently than one that is publicly owned? Given my previous comment that sustainability, longevity and legacy are key essentials, you make decisions based on achieving these essentials. You don't worry about short term profits, you don't worry about other stockholders (Class A), and you don't worry about stock price! You need compensation to live on so you focus on safe dividends and if you make enough money in the year just ended, you issue a special dividend. You also get to ignore the din of other stockholders clamoring for stock buybacks as a way to increase earnings per share and, therefore, stock price so you can achieve capital gains. You're the Ford family and you're not expecting to sell your stock so what does it matter what price the stock is?

You own/manage your company so that it will be profitable over the very long term and so that your legacy will live on. You also know that, over time, your stock price will eventually be a function of your profitability. If you manage your company to be profitable for the long term and you're successful in achieving this, its stock value must eventually increase. That is why Ford is investing strategically in EVs, battery improvements, design changes, platform consolidation, automated driving, increased use of technology and connectivity, increasing market share in growing regions such as China, India and Africa, etc. How they execute will determine their long-term profitability. That long-term profitability will determine how much they increase their wealth from an increasing stock price (at whatever pace that happens) and how much they can raise the floor of their regular dividend and, as privately held companies do, decide from the profits that they've already made what they want to distribute to shareholders including the family.

This takes me to the answer to the second question I posed earlier of what should you expect if you own Ford stock. If you're content to accept this way of how Ford owns/manages the company and if it is successful in their strategy and execution, you get to go along for the ride (pun intended), collecting your dividends, and if your investment time horizon is long enough, pick up some price appreciation as well.

If you're looking for something other than solid dividend income with the specter of some future price appreciation, albeit long-term, without the ability to influence how the company operates, then I would strongly suggest that Ford is not a stock investment for you and you should be investigating other companies in which to invest. If you understand this before you make the decision to purchase the stock, you will save yourself a great deal of angst during highly volatile periods like the one in which we currently find ourselves.

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Disclosure: I am/we are long F.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.