Ford (NYSE:F) is one of the most amazing turnaround stories in the last few years. The company went from being near bankruptcy to being a cash cow within a matter of few years. Just a few years ago, Ford was included in the list of companies to be bailed out by the government, and today it is standing strong, posting impressive growth.
Out of the whole Ford story, I think, the most impressive part is the company's ability to cut costs and shrink its massive debt in such a short time. I believe that the company's debt is still very large and it will still take some time to completely get rid of all this debt, but at the same time I believe that once the debt is mostly gone, Ford will be able to do even better things including stock buybacks and higher dividends, which will fuel capital appreciation for Ford investors.
Back in 2008, Ford's total debt was $151.67 billion. Ford was running out of cash and it was going to have to pick between more debt or government bailout. Because Ford's credit rating was very low at the time, the company was looking at an annual interest rate above 7% in order to get more debt. At that point the company started to perform better and it didn't need the government bailout.
By 2009, Ford's total debt was reduced to $131.63 billion. The next year, Ford paid more of the debt, reducing its total debt obligations to $103.99 billion. By the end of 2011, the company owed $99.48 billion and it has cash of $17.15 billion. This means that within 3 years, the company's debt was reduced by more than $50 billion while the company was able to save cash as a cushion. At this rate, Ford's debt should be very manageable and fall below $50 billion by 2016.
A few weeks ago, Fitch raised Ford's debt level to investment level from junk level. It is very likely that other rating agencies will follow and Ford's financing costs will come down substantially. Right now, Ford's bonds are very safe, yet they have high yields compared to their safety; however, many institutions are unable to invest in these bonds due to their low credit ratings. In the future, more institutions will be able to buy Ford's debt as it will have a better credit rating.
Once the company is done with this debt, it will have an additional $3-5 billion annually to spend on other things. As Ford's market cap is $40 billion at the moment, each billion dollar spent on dividends will result in an additional yield of 2.5%. With the additional free cash, the company will be able to buyback 4-6% of its shares annually, resulting in significant capital gains.
I believe that Ford will present great opportunities in the long term. By long term, I don't mean 2-3 years; rather I mean 5 to 10 years. The company will definitely reward the patient investors, however impatient ones with short term horizon might find better deals elsewhere.
Disclosure: I am long F.