- Ford is an excellent combination of superb value and healthy dividend growth.
- While waiting for capital gains, investors in Ford's stock are receiving a high dividend yield of 4.54%.
- While February was a solid month for the auto industry, it was an even stronger month for Ford.
Automakers' stocks have not pleased investors in the last year. In fact, among the ten automakers' stocks, trading in U.S. markets, only Tesla (NASDAQ:TSLA) has given a positive return in the last 52 weeks (including dividends where applicable), as shown in the chart below. However, during the last four weeks, all of these stocks except Toyota Motor Corp (NYSE:TM) have seen their shares rise significantly higher.
As I see it, there are some good investment opportunities in these stocks. One of them is Ford Motor (NYSE:F). In my opinion, Ford is an excellent combination of superb value and healthy dividend growth. It has compelling valuations with a trailing P/E as low as 7.19, very low price to free cash flow at 7.96, and an extremely low PEG ratio of 0.65. Furthermore, Ford is paying a generous dividend, currently yielding 4.54%.
Since the beginning of the year, Ford's stock is down 3.5% while the S&P 500 Index has declined 3.2%, and the Nasdaq Composite Index has lost 7.2%. Since the beginning of 2012, Ford's stock has gained only 26.3%. In this period, the S&P 500 Index rose 57.4%, and the Nasdaq Composite Index rose 78.4%. According to TipRanks, the average target price for Ford stock by the top analysts is at $14.70, an upside of 11.1% from its March 8 closing price. However, in my opinion, Ford stock price could go much higher.
On January 28, Ford Motor reported its fourth quarter and full year 2015 financial results, which beat EPS expectations by a big margin of $0.07 (13.7%). Revenue of $40.3 billion also beat the consensus estimate of $35.8 billion. Ford delivered a significant earnings surprise in two of its last four quarters, as shown in the table below.
Source: Yahoo Finance
The higher earnings were driven by a 12% increase in wholesale volume and a higher operating margin, which rose 2.7% to 6.1%. North American pretax profit rose 26% during the fourth quarter. Revenue totaled to $40.3 billion, up 12.3% year-over-year. The increase reflected higher volume and pricing, and an improved product mix. Ford completed all 16 product launches that it had planned for 2015.
On March 01, Ford announced that it had posted the best February U.S. retail sales in eleven years, and the best-ever month for SUV sales. Ford U.S. sales were up 20% in February versus a year ago with 217,192 vehicles sold. Retail sales grew 11%. Retail sales gains came across the product portfolio. Cars gained 6%; trucks increased 5%, and SUVs were up 22%. Ford SUV sales last month totaled 65,016 vehicles, up 28% versus a year ago. Edge jumped 91%; Explorer was up 18%, and Escape gained 14%. F-Series sales were high too, with 60,697 vehicles sold, a 10% increase, marking Ford’s best February for the F-Series in a decade.
Strong February sales results strengthened my belief that Ford is poised for continued growth. While February was a solid month for the auto industry, it was an even stronger month for Ford. Customer demand for its newest vehicles, including the new high-end series of Explorer and Edge, helped Ford increase its average transaction prices at almost double the industry average. According to the company, it is offering more high-end options for truck and SUV customers, having the capability that fleet buyers value, as they are reinvesting in their fleets and are strengthening its business.
Dividend Yield At Historical Highs
While waiting for price appreciation, investors in Ford's stock are receiving a high dividend currently yielding 4.54%. The current yield is historically high, which indicates that the stock is undervalued, according to some dividend assessment theories. The payout ratio is only 32.4%, and the annual rate of dividend growth over the past three years was very high at 44.2%.
According to Portfolio123’s "ValueRank" ranking system, Ford's stock is ranked second among all 83 S&P 500 Consumer Discretionary companies. The "ValueRank" ranking system is quite complex, and it is taking into account many factors like; 5-years average yield, sales growth, trailing P/E, price to book, price to sales and return on equity.
To summarize, Ford is one of the top U.S. automakers when it comes to vehicle offerings and manufacturing capability. In my opinion, Ford stock is an excellent combination of superb value and healthy dividend growth. While waiting for capital gain, investors in Ford's stock are receiving a high dividend, currently yielding 4.54%. All these factors bring me to the conclusion that Ford stock is a smart long-term investment.