Why Ford Is More Than Just A Great Income Stock

| About: Ford Motor (F)

Summary

Ford has a stunning yield, but also has excellent profit growth potential.

An increasingly green focus, product development, export potential and a growing domestic economy are clear catalysts to push its financial performance and share price higher.

Ford offers excellent value for money and with sound finances, looks set to reverse recent declines in its share price.

It's hard to believe that while interest rates stand at 50 basis points or lower and the S&P 500 has a dividend yield of 2.3%, Ford (NYSE: F) has a forward dividend yield of 7%. This puts it into the upper echelons of high-yielding stocks and, for income-seekers, we firmly believe that it remains one of the best opportunities out there.

Clearly, the 7% yield figure includes the recently announced $0.25 per share special dividend and assumes that Ford will maintain quarterly dividends at the same level as last year (i.e., $0.15 per share per quarter) during the course of 2016. With Ford's most recent guidance stating that it expects revenue, operating margins and earnings for 2016 to be equal to or higher than their 2015 levels and dividends being covered more than twice by earnings last year, there is scope for further rises in shareholder payouts even if the company's profitability remains at a similar level to last year.

Looking ahead, we think that Ford has the potential to deliver significant improvements in sales and profitability in the long run due to a number of key catalysts. One example is Ford's continual innovation, which allows it to maintain its competitive advantage over sector peers. For example, it recently announced that start/stop technology will be fitted to the EcoBoost version of the bestselling vehicle in the US, Ford's F-150 pickup. This should help to boost the green credentials of the vehicle and strengthen Ford's F-150 sales outlook among more environmentally aware consumers, which has the potential to positively catalyze its financial performance moving forward.

Of course, this is the latest change Ford has made to become viewed as a more sustainable and environmentally aware business. It has also revamped its supply chain to include multiple renewable materials for use in production vehicles, and with Ford being ranked first in Interbrand's list of the 50 best global green brands as recently as 2014, we think that the company's sales outlook is positive - especially as more consumers shift to greener vehicle options.

In addition, the outlook for three key regions in which Ford does business is also encouraging and could prompt increases in Ford's profitability over the medium term. For example, US vehicle sales hit record levels in 2015 and this trend is due to continue in 2016, while in Europe a policy of quantitative easing helped lift new car registrations by 17% last month. Furthermore, in China, Ford posted a sales rise of 3% last year and this bodes well for its considerable investment in the country, where it has ploughed investment into new plants and also returned the luxury Lincoln brand to showrooms.

On the topic of export potential, Ford is in the process of rationalizing its global footprint and recently announced that it will pull out of Japan and Indonesia. We think this is a prudent move and will allow Ford to focus resources elsewhere, with its export potential being evidenced by the launch of 24 new global products in 2014. And with Ford's relatively new exposure to the Middle East and Africa offering exceptionally high growth potential, we think that a mix of upbeat domestic sales plus improving export sales will have a positive impact on Ford's top and bottom lines in 2016 and beyond. That's even when the prospect of an appreciating dollar is factored in.

On this topic, with US interest rates having risen in December and likely to continue their rise over the medium term, Ford's debt is likely to come into sharper focus. On the face of it, Ford's balance sheet is highly leveraged, with total debt of $119.2bn at the end of 2014. When Ford's net assets of $24.8bn are viewed alongside this debt figure, many investors may feel that Ford's financial performance will suffer dramatically from higher debt servicing costs and that investor sentiment will weaken in the coming months.

However, with $105.3bn of Ford's total debt being from its financial services arm, Ford's motor company debt levels remain much more prudent and equate to a debt to equity ratio of 95%. We think this is a manageable level and that Ford's balance sheet risk remains acceptable. And while investor sentiment towards Ford remains weak as evidenced by its share price fall of 20% in the last year, we firmly believe that in the long run, its share price will mount a strong comeback.

With Ford trading on a forward P/E ratio of 6.2 versus 15.7 for the S&P 500 and a price to sales ratio of 0.33, it offers considerable upward rerating potential. With clear catalysts including a high degree of innovation, an increasingly sustainable brand that resonates well with customers, huge export potential, an improving US economy and a sound financial footing, we're bullish on Ford's long-term prospects. And with it yielding 7% and having tripled dividends in the last four years, we think it's a great income stock, but will prove to be so much more.

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned, nor should it be considered financial advice. These are only the author's personal opinions and you should do your own research.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.