Ford (NYSE:F) Debt
A few years ago Ford stock dropped to nearly one dollar a share; General Motors went into bankruptcy and one company's stock rebounded while the other disappeared. Since then General Motors (NYSE:GM) has issued new stock.
At the same time Ford Motor Company made a large tender offer to buy back a significant amount of debt. They paid handsomely to those who tendered their Ford bonds in 2009. Moody has raised Ford's credit rating five times since September 2009, most recently on May 22, 2012 to Baa3, so they are now Prime-3 (signifying acceptable ability to repay debt.)
Ford has $23 B in cash and $100 B in debt; $136 B in revenue and $20 B net income applicable to common shares. Ford is now over $10 a share however can potentially go back to $7 or lower if the stock market falls precipitously again.
Ford Equity / Debt Ratio
For those looking for bigger yields and exposure to Ford Motor Company consider .5 - .05 % in Ford equity and 2 - .5 % in Ford debt (see an exception for a smaller portfolio below.) Larger investment portfolios should consider reducing the total holdings to limit the total risk.
The two bonds to consider here are the 2043 7.75% (CUSIP 345370BM1) and the century bond 2097 7.7% (CUSIP 345370BS8.)
|Portfolio Size||Ford Stock price 10.35||Total||Ford Bonds (June 2043 7.75% price 114.30 / May 2097 7.7% price 115.50)||Total||Equity / Debt Ratio|
|$25,000||12||124||1 / 0||1143 / 0||.5% / 4.5%|
|$125,000||25||259||2 / 0||2286 / 0||.2% / 1.8%|
|$250,000||25||259||2 / 1||2286 / 1155||.1% / 1.3%|
|$500,000||50||518||2 / 1||2286 / 1155||.1% / .6%|
|$1,000,000||50||518||2 / 2||2286 / 2310||.05% / .46%|
|$3,000,000||100||1035||5 / 2||5715 / 2310||.035% / .26%|
|$5,000,000||125||1294||5 / 5||5715 / 5775||.025% / .23%|
|$10,000,000||150||1553||7 / 5||8001 / 5775||.015% / .14%|
|$25,000,000||200||2070||10 / 5||11430 / 5775||.008% / .07%|
|$35,000,000||225||2329||15 / 5||17145 / 5775||.006% / .06%|
The point is to work with dollar figures that will not sink your portfolio, if the company fails. The bond income will begin to pay for the stock position; $155 dollars annual fixed income is fractional to a $125,000 portfolio, as $1,500 is to a $35 M portfolio. However over the long term you are invested and have some exposure.
In ten years the smaller portfolio has generated $1,550 and the bigger portfolio, $15,000. The strategic consideration is to use this income to further increase the overall yield, by perhaps getting more Ford stock, or higher quality non Ford bonds, or income generating securities. This way if the U.S. economy drives off the 'fiscal cliff,' your portfolio will not be anchored in a stock that can go to a couple dollars a share.
The fact that Ford stock fell so low when the market dropped is cause for some concern. Even bonds can be negatively affected or become worthless if a company goes bankrupt; so a good strategist must look for value down to the hundredth of one percent of a portfolio. This is the key to balance; consider each percent of your portfolio's purpose and risk.
Many bond investors are tempted by General Electric (NYSE:GE) Capital bonds, though GE is steeped in debt. Consider alternative high yield bonds and higher grade bonds to couple with the popular GE bonds. For instance some Ford bonds for yield and some Microsoft (NASDAQ:MSFT) or Berkshire (NYSE:BRK.A) bonds for higher credit rating (or US Treasuries.)
Century Bond Analysis
Note that there are two bonds in this composition the 2043 7.75% coupon and the 2097 7.7% coupon. The century bond has conditional calls:
"The Debentures are subject to Ford's right to shorten the maturity of the Debentures, and/or to redeem the Debentures, if a Tax Event occurs."
The 2043 bonds currently have a 6.65% yield and the century bonds have a 6.67% yield. When Ford made a tender offer for the century bonds they offered $1,500 per bond and tendered $196 million worth. This left 142 million of the 2097 bonds outstanding.
Currently the Ford century bonds are being offered in lots of 5 bonds. So to implement this strategy look for a lower minimum quantity offering, to find one or two of the bonds. The 2043 bonds are currently being offered in lots of 1 bond, this is one reason I chose them for this portfolio.
To properly analyze a bond investors should research credit rating, financials (debt / cash, revenue, income,) and the nature of the company's business:
- Ford has been upgraded several times in the past three years and is currently rated Baa3. To put this in perspective, Spain was recently cut three steps to Baa3; the lowest of the lower medium credit grade.
- With over $100 B debt Ford has a 23% ($23 B) cash to debt ratio.
- From 2010 to 2011 Ford's net income went up over 30% from $6 billion to over $20 billion.
- Ford makes cars and trucks and recently has begun introducing more advanced technology, such as Microsoft Sync entertainment and parallel park assist technology.
Ford "Auto Parallel" Debt
Investors and customers must wait and see if newer technology such as automatic parallel parking will be a successful feature, or if there will be kinks to work on. However advancements such as these are what some investors have been looking for.
Ford has a very difficult challenge to create safe automobiles and provide excellent service. The cars need the level of safety Boeing (NYSE:BA) provides for their airplanes, however more often automotive malfunctions are common. Ford cars and trucks have the risk of recalls and law suits related to malfunctions, though the effect on Ford debt should be limited; if quality fails so will the overall company.
Consumers vs. Shareholders
Businesses and families that need reliable transportation have turned to Ford for a century; however upper class consumers may look to higher quality vehicles. The company has produced Lincoln brand higher end vehicles since 1922, and continues to reach globally. Ford sold nearly 50,000 vehicles in China this May.
Shareholders and owners of Ford stock and bonds can reasonably hope that the company will retain quality leadership. However the volatility in automotive equity encourages very conservative allocation.
Potential investors might simply ask Ford owners if they like their vehicle. Especially consumers who own and maintenance the newer vehicles to get a sense for whether customers are satisfied. This may seem old fashioned however you can form an opinion of whether the company is worth your investment dollars.
If you have any additional considerations on Ford equity or debt please comment below. If you see a nearer term Ford bond that might work for this portfolio add your thoughts and the CUSIP.