On January 12th, Ford (NYSE:F) announced record profits in 2015 with the expectation that 2016 will show equally good profits. In the same press release, the company announced a special dividend of 25 cents to be paid with the regular dividend of 15 cents. Altogether that comes to a 40-cent dividend this January. Since that announcement, the market has punished Ford by dropping its share prices below $12 for most of the week. I understand the reason why people are unhappy with Ford, but the market has fundamentally misunderstood the situation.
First, the reason why the market is punishing Ford after all this good news. Before I get into the details, it must be understood that Ford is not seeing record profits because of cost cutting measures with lower underlying sales. Ford's business divisions are split along geographic lines, and all of the company's markets are seeing robust sales, with sales expected to be stable or increasing in 2016. In order to understand the market's reaction, we have to turn to a different car company, General Motors (NYSE:GM). GM also announced excellent results for 2015. In this announcement, GM raised the dividend 6%, as well as increasing the share buyback program by 80% to $9 billion over two years. This is a major commitment, paying out significant funds to investors over the next two years. The market was expecting something similar from Ford, and was disappointed when it didn't get that same commitment. The problem here is that Ford is thinking long term, while the market is thinking short term.
The Ford family still has a controlling interest in the voting shares of Ford, which can be both good and bad. In this particular situation, it has given the company the freedom to make decisions that are beneficial in the longer term instead of reacting to short-term market expectations. The Ford family remembers, even if many of us have forgotten, how all the car companies had to cut out their dividends for several years after the "Great Recession" of 2008. They lost a significant portion of their income in that recession. Over the last 100+ years, the auto industry has seen many up and down cycles. Right now, we are clearly in an up cycle, but eventually this will change and the auto market will contract again. When that happens, Ford doesn't want to be in the situation of having to cut the dividend significantly, perhaps entirely, again. For the value and income investor having a sustainable dividend, currently a healthy ~5%, with excess cash paid out as a special dividend, is better than boosting the dividend to unsustainable levels in return for a short-term boost in share price.
Ford is also taking notice of emerging technologies and how they will affect the auto market. The company has made great strides in considering how cars can fit into the new internet of things. Systems such as FordPass, SmartDeviceLink, and Ford's deal with Amazon to remotely access the home from the car and vice versa through Amazon's (NASDAQ:AMZN) Echo, are all moves in the right direction. SmartDeviceLink will also be designed to handshake with Apple (NASDAQ:AAPL), Android (NASDAQ:GOOGL) (NASDAQ:GOOG), or Microsoft (NASDAQ:MSFT) mobile software. Mobile software makers are also working to develop integrated technology for auto, but having a third party software designed to work with any technology will appeal more to consumers, and in the long term will be better for the car companies that adopt it. Years of software compatibility problems between Microsoft Windows and Apple OS proved that it is impossible for competitors to design truly compatible software. In the engine, Ford has made great strides in fuel efficiency with its EcoBoost system. Ford has also signed a collaborative agreement with Toyota to create a rear wheel drive hybrid system for trucks. Electricity may be the eventual future of autos, but the near-term future is fuel efficiency and hybrid technology. Ford is hedging its bets for the far future by working on both battery and hydrogen fuel cell technologies. Ford Focus is already available in plug-in hybrid or all electric configurations. Ford has also announced a collaboration with Daimler (OTCPK:DDAIY) and Nissan (OTCPK:NSANY) to develop a commercially-viable, mass-market fuel cell vehicle which could be on the road as soon as 2017.
Those are the long-term arguments for buying Ford. At the moment, there is also a significant short-term reward. This short-term reward is relatively simple to compute. For simplicity's sake, a good average buy price to use is $12, although Ford has dropped below that mark for much of the past week. Between the regular dividend and the special dividend, Ford is paying investors 40 cents this January. This is a return on investment of 3.33%. Ford goes ex-dividend at the end of the month. A 3% return over a 2-week period gives an annualized return on investment of 78% (1.5% per week; 52 weeks in a year). After the dividend comes the question, for the short-term investor or the long-term investor who overbought Ford so they could cash in on the dividend, of whether they can cash out all or part of their position at the entry price, if not a higher price.
There are two important macro risks to consider. First is general market risk. We are in the seventh year of a bull market. The longer a bull market lasts, the greater the risk of a bear market. While I can't say for certain when the market will turn, any investor with experience will tell you it always does eventually. The second risk is a global economic slowdown, especially with the slowing growth of China, which has been one of the key drivers of worldwide economic growth. On the other side, there are some significant positives which could boost Ford's share price. Since February of last year, Ford has dropped from a high just over $16 to below $12 today. That is a 25% drop in a year where Ford has had record profits, going into a year where Ford expects continued record profits. The market is fickle, eventually it could forget about Ford not giving a big dividend increase this quarter and instead remember the record profits. From a different direction, for the chartists reading this, take a chart of Ford's stock price over the last 20 years. Remove the outliers, the "Great Recession" (~2008-2009), and the tech bubble (~1998-2001), and you will find Ford has traditionally traded in a range between ~$10 and ~$15. Ford is currently sitting in the bottom half of this range.
As long as Ford continues to drop on the good news, I'll keep buying a little more every day until it goes ex-dividend. I believe that Ford is a good long-term value investment and plan to keep a position in the company after the special dividend is paid. I may lighten up on this position after Ford goes ex-dividend for the sake of diversity. As with any investment there is some risk; in this situation, I consider the risk well worth taking.
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.