China Sales Helping Ford
The news couldn't have come at a better time for Ford which, like other automakers, is grappling with declining auto sales amidst a very tepid economy. The silver lining for Ford in the July's auto sales report is that its sales, which fell by 3% in the month, declined at a slower pace than analysts had been expecting.
The lackadaisical economy, and perception that it will force consumers to postpone significant cash outlays on items such as motor vehicles, has hit Ford's stock in the year-to-date. Its shares are down by 13.5% which, conversely, has helped bring its dividend yield up to nearly 5% - a yield that is among the highest for listed automakers.
Up until a few years ago, Ford was a component of the Dow Jones Industrial Average - we bring this up because its 4.92% dividend yield is better than the dividend yield of any Dow stock. Investors who purchase $10,000 worth of Ford shares can therefore expect $492 in passive income just by holding onto the shares for a year.
Ford's average dividend yield in 2016 is at its highest level over the past five years so investors are probably wondering whether now is a good time to buy its shares.
To this, we say that if an investor is willing to ride out the volatility and not seek immediate gratification in the form of capital gains, Ford could actually be a star performer in their portfolio. Here's why.
Dividend and Outlook
First, Ford's ability to continue paying its solid dividend isn't constrained by its balance sheet. For one thing, Ford's liquidity and debt ratios are far better than the industry average: the company has over $3.40 of current assets to meet each dollar of its current liabilities compared to just $2.28 for its peers. Meanwhile, its leverage ratio of 7x is less than half the industry average of nearly 18x.
To be sure, Ford's leverage ratio of 7x is still objectively on the high side - and is actually closer to that of a bank like JP Morgan (NYSE:JPM), which has an 8x leverage ratio - but most of this can be attributed to Ford Credit, its financing arm, which has countervailing assets like buckets of auto loans, with which to match liabilities.
What's more, outside of its financing business, Ford's Cash Net of Debt improved to $14.1 Billion in the first half of 2016 compared to just $10.8 Billion the end of 2015. This may be attributed to its auto segment's operating cash flow of $4.2 Billion at the end of the second quarter, which was a record high. The decline in Ford's leverage and robust liquidity was such that Ford earned a credit upgrade from ratings agency Fitch.
Ultimately, Ford's quarterly dividend of $600 Million translates into roughly $2.4 Billion of annual dividend payments - a pittance compared to the $39 Billion in cash and equivalents it held at the end of the second quarter. In short, Ford's unlikely to have any difficulty paying its dividends anytime soon.
Second, despite the gloom surrounding the sector, things aren't as bad as they seem: while auto sales did miss expectations in July, they were nonetheless slightly better than they were a year earlier. Moreover, although Ford's July sales were 3% lower than they were in July 2015, its year-to-date sales are actually up by 3.3%, a far better fate than the 4% decline in GM's (NYSE:GM) own to-date sales. Of course, the interesting dynamic here is that while Ford's overseas fortunes were driven by robust light car sales, its domestic fortunes were driven by sales of light trucks.
Going forward, Ford's sales are expected to be flat for the rest of 2016 and 2017 - before accelerating in the three years after. This would bring Ford's expected annual growth rate to nearly 9% over the next five years - not as strong as the industry, which is expected to grow by 11% - but nevertheless a much faster pace than the 4% rate it delivered in the previous five years.
Third, Ford's stock is cheap - it's trading at less than 5 times it trailing earnings and 6.5x times its forward earnings - both these ratios are less than a third of the current and expected Price-Earnings ratios of the two major market segments. Ford's also valued at only $0.32 for every dollar of sales it makes - that's far less than the nearly $29 for every dollar of sales that its industry is valued at.
Currently, analysts have set a $13.53 median price target on Ford's stock. If we're going by market comparisons, this seems a little low. To wit, the forward Price-Earnings ratio for the S&P500 is 18.6x - if we assume that Ford will trade at half that ratio because of market skepticism towards automakers and Ford is expected to earn $1.88/share in 2017, then Ford should be trading at $17.45/share - or about 9% more than the high analyst target price of $16. A $17.45 price target would mean that Ford has a long-term upside of over 43% - high given the current market sentiment but it may not look this way in a few years when automakers gain more solid footing.
While this is certainly not a perfect comparison - for one thing, the S&P500's 2017 earnings are anticipated to be nearly 15% higher than its 2016 earnings while Ford's earnings in 2017 will be essentially unchanged from 2016's, we can say that Ford is being unfairly penalized for belonging to an out-of-favor industry. How else does on explain a stock price that's dropped by 13.5% even as it reported record second quarter and first half pre-tax profits in Europe and North America, respectively?
In our view, dividend investors should take a long view regarding Ford - focus on the dividend for now and wait as a recovering US economy floats the tide for the auto sector - and auto stocks.
Ford is not a sexy investment today. In fact, it's been a dog for much of 2016. However, a closer look reveals a superb dividend yield, a company that's doing better than its peers and a stock that's undervalued.
Investors who are looking for immediate gratification should look elsewhere but for those patient investors who want to build a long-term portfolio with potential, Ford is one stock they shouldn't ignore.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in F over 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.
Additional disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.