Ford looks like a buy after reinstating dividend

The 5-cent payout adds to Ford's attractiveness for investors.

By InvestorPlace Dec 9, 2011 11:15AM
Tetra Images/Getty ImagesBy Jeff Reeves


Ford Motor (F) made headlines on Thursday by reinstating its dividend. The Detroit automaker had eliminated quarterly dividend payments about five years ago. But Ford will now pay 5 cents per share to stockholders of record as of Jan. 31, 2012, with the first payment to be made Mar. 1.


The move raises two questions. First, is the dividend all that great? Second, is does the quarterly payout make Ford stock a buy?


Let's start by breaking down the dividend. At 5 cents a share, that's an annualized yield of about 2%. Not bad. It's also the same amount it paid last time around, on September 1, 2006. The difference is that last time the 5-cent dividend was a 50% cut from the 10-cents it paid earlier in 2006. And it paid and as much as 50 cents a share just a few years prior.


That dividend obviously wasn't sustainable, nor was the 25 cents a share General Motors (GM) was paying in 2006 -- roughly 4% yield at the time for both automakers. So there's no reason to consider the new 5 cent payout a lowball.


Consider Ford's peers, too. Toyota (TM) yields almost 1.7%, and Honda (HMC) yields about 1.9%, so there's no reason to shirk Ford for a higher-paying competitor.


As for share prices, investors have less to be cheerful about as Ford is off an ugly 35% so far in 2011. But the company's fundamentals really aren't so bad. It has posted year-over-year revenue increases for the first three quarters of 2011 and is tracking another revenue beat in the current quarter.


Yes, in its Q3 earnings Ford posted a pretax profit of $1.6 billion -- a slight slide from the same period in 2010 and its second straight quarterly decline in year-over-year EPS. However, earnings are on track to more than double fiscal 2009 numbers this year with over $2 per share compared with EPS of just 86 cents two years ago.


Also, Ford has held onto market share gains it made when Chrysler and GM went belly up a few years ago. Now it claims a market share just shy of about 16.7% in the U.S., behind only GM's 18.1%. Ford's innovative line of new vehicles netted three of the top-six selling vehicles in November: the F series pickup at No. 1, the Escape SUV at No. 4 and the Fusion sedan at No. 6. Thanks in part to strong November auto sales, the result is a roughly 11% year-to-date gain in sales over 2010 numbers.


As you can see, there's a lot to like about Ford stock. However, investors should be aware of some of the company's difficulties. Primarily, a weak auto market overall continues to weigh on manufacturers -- from peak annual sales in the U.S. of over 16 million vehicles to what will be around 12 million in 2011. While that's up from around 10.6 million during the recession, it is still a long way down from previous levels. Meanwhile, Chrysler is back from the brink too, but returning to 2006 numbers anytime soon seems like a pipe dream -- even if all goes just right.


Another knock against Ford is that Standard & Poor's continues to rate the carmaker's debt less than "investment grade" -- commonly known as "junk." Yes, the company keeps paying down its outstanding debt and saw a credit upgrade in October, but that was just to BB+, a notch below the all-important BBB investment grade rating. In this difficult credit market, you can't underestimate the power of access to debt at reasonable rates.


Perhaps most uncertain is the outlook of the Chinese auto market. Japanese and American automakers are racing to the region with the prospect of never-ending sales increases, but fears of a slowdown in China could mean Ford gets a rude awakening if Asian consumers cool their demand for Western autos. Troubles in Europe could also hurt Ford, but to a lesser extent.


It's important to be realistic. Still, Wall Street analysts, on average, have about a $15 price target on Ford stock because they believe it has much more upside ahead. You can bet that the reinstated dividend will help add to Ford's attractiveness in the New Year, too.


Barclays downgraded its target from $20 to $15 -- but share prices have kept falling to briefly touch single-digits at the end of November. That could signal Ford is a bargain buy, especially for long-term investors who are interested in tax-efficient gains and a decent dividend.





Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.


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1Comment
Dec 9, 2011 12:46PM
avatar
Excellent article, very balanced and realistic. THANKS!
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