Ford: I Love The Boring 5.2% Yield

Summary

• Ford continues to have broad momentum in the EV category, even if April EV sales declined in April.
• Inflation is easing, taking pressure off of Ford’s EBIT margins. I see potential for Ford to increase its EBIT outlook if cost inflation subsides.
• Ford confirmed its outlook for FY 2023 and the dividend should prove to be safe.

Bill Pugliano

Investors have been forced to deal with a significant increase in market volatility ever since a new crisis developed in the U.S. financial system in March. Debt ceiling negotiations are also creating additional uncertainty. However, I believe that Ford (NYSE:F) actually provides investors with a lot of value during times of increasing uncertainty, in part because Ford produces a stable 5.2% dividend yield that should should be supported by the firm's free cash flow in FY 2023. Ford continues to see solid momentum for its electric vehicle products as well and the automaker on Monday confirmed it’s EBIT and free cash flow outlook for FY 2023.

As indicated in my work “Ford: Surprise Potential In FY 2023”, I believe Ford’s earnings prospects are undervalued and while the auto maker’s 5.2% dividend may be boring, investors can likely expect the company to keep paying a stable dividend even during times of increasing volatility.

Ford continues to have upside in EV deliveries

Ford has debuted a number of new electric vehicles in FY 2022 including the Ford Lightning pickup truck and e-Transit in the commercial van market in order to increase the density of its EV product line-up. In April, however, electric vehicle deliveries slumped 25% year over year due to production interruptions, Ford is still ramping up it EV production and could see strong growth in this category throughout the year. Ford's Lightning production was briefly halted during the first-quarter due to a F-150 Lightning catching fire. Nonetheless, Ford said that it delivered 1,335 Ford Lightning trucks in April, showing a more than 2,000% increase year over year. With production ramping up for the F-150 Lightning in FY 2023, I expect Ford to experience a gradual rebound in EV deliveries throughout the remainder of the year.

Source: InsideEVs

Inflation is easing, EBIT margins could increase

Inflation has been a key headwind for Ford in the last year, which resulted in higher supplier costs and pressure on EBIT margins. Higher costs and the potential for lower margins have both weighed on Ford's share price performance in recent months. However, with inflation easing and dropping to 4.9% in April, Ford could find relief on the EBIT margin front as well.

Source: Bureau of Labor Statistics, Federal Reserve

Ford continues to expect between $9B and $11B in adjusted earnings before interest and taxes in FY 2023 as well as approximately $6B in free cash flow. Ford confirmed this guidance at Monday's Capital Markets Day where the company also laid out its plan to grow EV production to 2M units annually by FY 2026 and grow its EBIT margin to 8%.

Ford could see up to 6% in year over year EBIT growth in FY 2023 while free cash flow is expected to drop off approximately 34% year over year. If margin pressures ease due to subsiding cost inflation, I believe there could be a chance for Ford to revise its EBIT forecast to the upside which may then result in a potential upside revaluation of Ford's shares.

Source: Ford

Ford's dividend costs the car brand approximately $2.4B each year, based off of a $0.15 per-share quarterly dividend. With an estimated $6.0B in free cash flow expected for FY 2023, Ford is set to distribute about 40% of its FCF as cash dividends this year and retain 60% to invest in its various projects, including the ramp of its EV line-up.

Ford’s valuation vs. key rival

Ford is currently valued at a P/E of 6.7X while the auto maker's shares pay a dividend yield of 5.2%. Ford is also trading below its 1-year average P/E of 7.3X. General Motors (GM) has a P/E ratio of 5.1X and is therefore slightly cheaper than Ford. However, Ford is the leading pick-up truck manufacturer in the U.S. and has an impressive and growing EV line-up which could boost the company's revenue potential this year.

Data by YCharts

Analysts currently expect Ford to deliver EPS of $1.80 per-share in FY 2023 and $1.75 per-share in FY 2023. The EPS revision trend is inconclusive as FY 2023 estimates dropped sharply earlier this year, but they have seen a bit of a recovery lately.

Data by YCharts

Risks with Ford

Because inflation is slowly but gradually easing, I believe margin risks for Ford half decreased in recent months and Ford could upgrade its FY 2023 EBIT outlook if the trends continue and EV production ramps up as expected in the second half of the year. A contraction in the U.S. economy could potentially result in a decrease of auto sales and result in revenue headwinds for the auto maker, however. What would change my mind about Ford is if the company saw a weak ramp in F-150 Lightning production and if EV sales failed to recover throughout the year.

Final thoughts

With market volatility increasing after a new financial crisis erupted in the community banking market in March and uncertainty over debt ceiling negotiations causing additional uncertainty, I believe Ford’s high-quality 5.2% dividend yield can provide stability. The automaker confirmed its adjusted EBIT and free cash flow outlook for the current year on Monday, has its strongest electric vehicle line-up in the history of the company and EBIT margin risks are decreasing… all of which I believe will support Ford’s shares and the 5.2% dividend yield!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of F either through stock ownership, options, or other derivatives. 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.

Comments

[Chartmaven]

F chart is scary bad..today's rally buys some time..how much nobody knows.
You have a bearish pennant forming on the Weekly and a break through $11 area projects a move to $7.50 area....

[RickJensen]

@Chartmaven
Yes, and a double flying Wallenda is forming.
The problem with technicals, is they are useless if they fundamentals change. And F's fundamentals, have changed.
Charting only shows you where you have been, not necessarily where you are going. (Rearview mirror driving)

[Kinkikowboi]

Just waiting to get the last laugh :D. long F

[Steve Funk]

"investors can likely expect the company to keep paying a stable dividend even during times of increasing volatility."
Could not disagree more. Check out the Ford dividend history;
www.nasdaq.com/...

It is anything but consistent. And F always cuts dividends quickly in a recession. Except the family F.PRB shares, which have a very solid dividend at about 7% by my calculations. Something about the family voting a better deal than the common shareholders always keeps me from buying F.

[RickJensen]

@Steve Funk
Any recent loss of the divi, has more than been made up.
Go back 10 years, there was a divi.

[MRTMG]

Ford and GM will go the way of Chrysler or American Motors in the foreseeable future. The American auto industry has given ample proof over the last 50 years or so years, that it is unable to compete with Asian auto makers as the Koreans and Japanese have incrementally and systematically taken market share by producing superior cars at a better price. An apparently unstoppable progression for the domestic companies. The domestic auto producers are no longer even auto producers because the Asians and Germans took so much of the auto market that there wasn't enough left for the domestics to make them economically viable when the market turned from autos to SUV's and trucks. Tellingly, the German and Asian auto companies are still in the US auto market so apparently, they can still make a profit in a market segment that the domestics had to abandon to concentrate their much-diminished resources in the SUV, truck and electric vehicle segments. The foreign companies are now dominating the domestic companies in the SUV market-as shown by the perennial top sellers-Honda and Toyota (sound familiar), recently joined by Hyundai-and it appears they are racing ahead in the development of EV's. Trucks are all that is left to the formerly mighty American auto industry but, if history is any guide, for how long. And this is not even considering the Chinese who are about to enter the US market with their far more advanced development of EV's: the cars of the future. You would hope the US would have learned its lesson with its open-door policy to the Japanese and Korean auto industry, but I doubt it.

[Silvio spicacci minervini]

@MRTMG I agree with you…

[stevehodg]

@MRTMG Not so true anymore. I'm a Japanese car buyer, always, but the value isn't there, especially at the rates they want vs Ford or GM. Value on vehicles like Maverick or Trax is superior. Not saying they will hold up like a Toyota or Honda but just that they are starting to offer really compelling products.

[Tdot]

Toyota and Honda take the conservative approach, slow evolution of the product, nothing too radical too fast, and introducing new features only when tested to death to make sure there are no defects. It is a maturity level that lends itself to long term reliability.

Ford and GM and other automakers tend to introduce new things rapidly to try to be "first to market" with innovations, but that lends itself to rushed development, rushed testing, rushed supplier selection and last minute churn that tends to produce more defects.

[labman106]

Do Ford vehicles besides the F-150 have the same appeal as most Japanese and Korean vehicles? While growing up Ford was the "blue collar" go to car.
Mercury's name plate circumvented that label to some point. Lincoln does that well. Can Ford survive the EV onslaught?

[MRTMG]

@labman106 No.

[RickJensen]

@labman106
F IS the EV onslaught.

[vooch]

I love Ford's SaaS product line. Thats where the money tree has been planted.

[jarratta]

@vooch Their BlueCruise self-driving is much better than our tesla's. Eventually the residual rev from those who want that feature will be over $1k/yr. Free $ to F.

[vooch]

@jarratta

Indeed anyone who followed Argo AI concluded that Ford's lvl 3 (and even lvl 4) would be a superior solution. I really liked Argo AI's method of having the AI 'learn' the different driving cultures in various cities.

[RickJensen]

Wait till they up pay payout ratio from 30 up to close to 50%.
Then you are really going to love it.

[hawkeyec]

Stock yields about average but the bonds are better and less risky. I have the 8.9% bonds due in six years, currently yielding 8%. Bonds make promises, stocks do not.

[jazznut]

Not so boring if your cost basis is much higher than what its trading at now.

[Silvio spicacci minervini]

Is this an article like those on baba?

[Bogie 1]

To the poster, Ford’s 5.2% yield is in direct correlation to its 35% drop in share value from its all time high. Its share value has tanked due to being known as the “ King” of recalls, who by the way cannot fix anything they recall. A horribly run company abusing the people who actually bought their vehicles. So their venture into EV’s is not something you’ll see people explore for future purchases. Whatever entity is supposed to be our watchdog is a prime candidate to be cut in the current budget negotiations.

[bassimmichael]

Ford in the last 12 months stock price dropped $2.00
$.15 dividend 4x = .60; not a great deal
Ford is becoming a master how to drive customers away.

[PEAK AUTOS]

@bassimmichael You need to add an additional .65 cent dividend to your total for $ 1.25. Most if not all of our auto stocks are not doing well over this 12 month period so the $ 1.25 over 36 cents for my GM stock is appreciated.

[pftthree]

It's not fair to compare F to a treasury note. LOL, like that is going to mushroom into a profit generator while your back is turned. This company has incredible potential.

[NavyGuy1981]

Buy a 5% two year treasury which is much safer and see what happens over the next two year... Stock is down ~14% over the last 6 months with a ho-hum future. Biden and the greenies are fizzling out with a new administration on the horizon as the laws of economics take over and government subsidies go away... Break, break the country is broke. ICE is not headed to the scrap heap. Just planted 1000 acres all with ICE and diesel .... Long live cheap reliable energy ... Enjoy your meal

[IntolerantRWJ]

@NavyGuy1981 BINGO !

Who is going to buy Ford or any other manufacturers EV ... darn sure won't be this unproductive, uninspired generation living in Mom's basement. ' WouldWorkers ... would work, but not inclined to, digs into my nap time '

[impulsebuy]

@@IntolerantRWJ

600 - 300 BC

The counts of the indictment are luxury, bad manners, contempt for authority, disrespect to elders, and a love for chatter in place of exercise. …

Children began to be the tyrants, not the slaves, of their households. They no longer rose from their seats when an elder entered the room; they contradicted their parents, chattered before company, gobbled up the dainties at table, and committed various offences against Hellenic tastes, such as crossing their legs. They tyrannised over the paidagogoi and schoolmasters.

[jarratta]

@NavyGuy1981 I wish I could lend you my Lightening for a few days. It can't do everything, but it does a lot. Better snow/mud performance than any of the dozen pickups I've owned. (Still keep my Tundra for hauling long-distance & gooseneck; and keep the Tacoma for wood & dump runs.)

It's a workhorse that has left every truck-owner who's driven it in awe of its ride and jaw dropping acceleration. I generate all my electrons so fuel savings isn't a big deal to me, but this truck has zero scheduled maintenance and vastly fewer moving parts. Huge savings there. The biggest change is being able to toss my generator. There's 4 120v outlets in the frunk and 3 in the bed + a 220v outlet there as well.

I have the max tow pkg and it hauls three horses well in my bumper pull. But not very far -- 120-150mi max. It gets regular over the air software updates that add new functionality & efficiency. It a better truck that is was 5k mi ago.

[EBIX EBUCKS]

I agree that Ford’s dividend is boring. No growth, there are CD’s that now pay as much, and F’s price seems unlikely to appreciate much. Maybe more special dividends if you’re lucky.

[matttrakker]

Um maybe, but you could just buy oil or tobacco and do the same thing? MO 8%, PDX I think was 6%.

[Jry295]

Granted nice to get a 5% plus yield and if I recall correctly there was a special dividend back in March. However Ford, in my opinion, will be a sucessful investment only if it appreciates in price (substantially) as it transitions to the EV market. Its price of $6.00 to $15.00 a share basically is not a return on investment even with a decent dividend. I hope to see Ford over $30 and rising in 2025 and beyond. Currently I relate Ford to "T".

[Silvio spicacci minervini]

@Jry295 over 30? I see ford plus Volkswagen and Porsche very very low and don’t seem to react. Do u think ford could explode to 30?

[RickJensen]

@Jry295
30 by 2025, is an almost certainty, IF, people value the company correctly. It's entirely possible that F makes more revenue off of subscriptions and services than it does off of auto sales.

[Jry295]

@Silvio spicacci minervini Once the EV market really opens up in the U.S. I think F will hit $30 and more. Question becomes when? I’m thinking at least 2 more years.