As a dividend growth investor my typical stomping ground is the realm of dividend achievers, aristocrats and kings (10, 25 and 50 consecutive years of dividend growth respectively). Lately, I've come to believe waiting for a company to grow its dividends 10+ years in a row means leaving a lot of potential profit on the table. For example, during the financial crisis a lot of great companies cut or eliminated dividends. This means that a dividend aristocrat could lose its status after just one bad year. So I began looking at companies that struggled and cut dividends during the financial crisis. My goal was to find a company that had reinstated its dividend and was growing it quickly. Moreover, I wanted to find a company with characteristics that would likely result in continued fast dividend growth going forward. In Ford Motor Company (NYSE:F) I believe I have found such a company.
Ford was forced to eliminate its dividend in 2006 after difficulties with profits caused by an over reliance on gas guzzling trucks in an age of increasing gas prices. In addition, high legacy costs from generous union pension and healthcare benefits hurt profitability. The financial panic of 2008 and great recession that followed resulted in a near 40% decline in auto sales from 2005 through 2009.
Source: Car & Driver
However, the dark times seem to have ended for the automotive industry. 2013 global vehicle sales reached a record of 82.84 million which is a 4.4% increase over 2012. Analysts are projecting that by 2018 global auto sales will surpass 100 million. In the US 2013 auto sales increased 7.6% to 15.6 million. By 2017, US sales are projected to reach 17 million.
Short Term Headwinds:
Ford recently reported a sharp drop in January and February sales of 7% and 6% (respectively) due to the extreme winter. This is a temporary event that will hurt first quarter results and possibly result in a buying opportunity.
A longer-term headwind would be the need to reduce inventory ahead of 23 new model launches over the next 2 years. Ford and GM (NYSE:GM) have been in a recent discount war; with Ford discounting by an average of $3305/vehicle this past month which is $100 more than GM. Its largest discounts were on its best selling F-150 (up to $8,000/vehicle). These kinds of heavy discounting will lead to lower earnings growth in 2014 but that should result in a great buying opportunity for long-term investors.
Ford has a lot of long-term catalysts that will drive its shares higher in the coming decade.
Europe, which has long been a losing region for Ford, is starting to turn around led by a thriving UK auto industry. Across Europe, Ford reported an increase of 9.2% in January sales. Thanks to a planned $450-$500 million in plant closures and cost cutting measures Ford expects its Europe division to break even in 2015.
Sales in China are booming with Ford posting an impressive 67% growth in February. Commercial vehicle sales were up 22%, passenger cars 81%. The Chinese auto market is expected to grow by 11% in 2014 which gives Ford ample opportunity for continued growth.
This is especially true given Ford's strong investment plans in China. As part of a $5 billion investment program designed to double production and market share (to 5% in 2014 from 2.5% in 2011) Ford is investing an additional $100 million into its Nanjing R&D facility. This is on top of an initial $200 million investment. By the end of the decade China is expected to account for 30% of Ford's sales. To put into context how important China is to Ford's future growth plans the company is introducing 15 of its 23 new models in China over the next 2 years. In contrast Europe is getting only 2 models and the Americas 6.
In fact, international sales will be the key to Ford's mighty future. By 2015 the company predicts that 50% of sales will come from overseas. Over the next decade management predicts that 70% of its growth will come from the Asia-Pacific region. To give a more specific example, Ford is expecting to sell 1 million cars in China in 2014.
Along with strong investment in global manufacturing capacity, Ford is planning on simplifying its operations. By 2017 the company plans on 80 total factories producing cars from 9 platforms vs 15 platforms today. This should allow for lower production costs and increased margins.
Undervaluation and Future Over Performance:
Right now Ford is trading at a forward earnings of 8.1. Does that mean its undervalued? Well Morningstar seems to think so claiming the company is a ⅘ star valuation rating. Morningstar's analysts say Ford has a fair value of $25/share. This would represent a 38.1% margin of safety.
If we look at Fast Graphs we can see that Ford is expected to grow its earnings at 10.1% over the next 10 years.
One can also use a discounted cash flow model to estimate Ford's fair value:
- 10 years at 10.1% growth (from fast graphs)
- 15 years of terminal growth at 5% (growth rate half of next decade)
- Discount rate, 9%, stock market's long-term historical return.
Under these assumptions I get a fair value of $39.66/share. This represents a 61% margin of safety.
Finally, one other method of valuing a company I like to do is to discount the projected 10 year price by the stock market's historical return of 9%. Looking at the above fast graph 10 year projected price of $53.5, one would discount this by 136.7% return the stock market is expected to return every 10 years. This would give a fair value of $22.60/share and represent a 31.5% margin of safety.
So in conclusion, after valuing Ford 3 different ways we get a range of fair values between $22.6-$39.66. This represents a margin of safety (aka discount to fair value) of between 31.5%-61%. If we take the average of these we get a fair value for Ford of $31.16 which represents a margin of safety of 46.25%.
Of particular interest to dividend growth investors is Ford's high dividend of 3.22%. This is nearly twice the industry average of 1.7%. In addition, from the Fast Graphs one can see Ford's 3 year dividend growth rate is 100% and its 1 year dividend growth rate is also 100%. Most important to long-term investors is the 11.5% CAGR expect dividend growth rate.
This high growth rate, combined with the high yield is the majority of the reason that analysts are expecting a 15.1% CAGR total return from Ford over the next 10 years (according to Fast Graphs).
Ford Motor Company has faced much hardship in the last 10 years and it was forced to eliminate its dividend for a 5 year period. However, now the company is back on secure footing. It is investing heavily in new models that consumers actually want and focusing on overseas markets where there is potential for double digit growth for decades to come. Given the company's massive undervaluation and projected fast growing dividend long-term investors are likely to experience market beating returns and a large and steadily growing stream of income.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.