- The US market is Ford's biggest market by far. An import tax by Trump would seriously upset the applecart.
- Huge investment in Europe could become unstuck if Ford has to pivot (and invest accordingly) in its largest market.
- Dividend investors should ignore the perceived strength of the payout ratio as it could change in a heartbeat.
The UAW (United Auto Workers Union) has stated recently that it will work with the president-elect Donald Trump to renegotiate NAFTA. Trump's economic plan put in a nutshell means companies like Ford (NYSE:F) which currently undertake practically all of its manufacturing for its light vehicles in Mexico could be in trouble. Here's My take on Ford under Trump administration.
Trump has gone on record as stating that NAFTA (North American Free Trade Agreement) was the worst deal signed by an American administration. Such strong words illustrate to me that Trump fully intends to follow through on his words, despite the lobbying that will invariably take place in the auto sector. Trump's objective is clear. Secure the borders. Get as many American companies manufacturing in the states as possible to create jobs which will eventually boost GDP. His tax regime points towards his aim to drastically cut corporation tax to 15% and also permit the repatriation of foreign profits for US multinationals.
Bearish commentary has eluded to a vast increase in the price of goods but essentially I don't see this as a huge problem as long as the dollar remains strong and incomes start growing. Strong economies have done this through the ages. High prices (especially for foreign goods) is not a problem as long as the wages and standards of living is there to keep up.
US Auto Sales Have Definitely Topped And So Has Ford's
I have been pretty vocal about my caution regarding investing in Ford. It's absence of strong competitive advantages plus the cyclical top that we definitely seem to have in the US auto sales now appear to be major headwinds for the Detroit automaker. The SARS or (Seasonally Adjusted Annualized Selling Rate) of 17.98 million was actually higher than I expected in October but Ford's revenues dropped by almost 12% last month. Furthermore, inventory came in pretty high at 90 days illustrating that stock is not moving as quickly as this time last year.
Although Ford's latest set of quarterly earnings was poor due to some temporary issues (door latch recalls, Super Duty launch costs, etc), I wouldn't be so certain of a bounce back in sales any time soon. The only bright spot in the October numbers was the span-new aluminum Super Duty and the new Continental sedan (Lincoln), both of which reported gains, but again this was predicted due to the launches.
Ford Will Keep Its Mexican Plants But Would Not Expand Their Number As Originally Envisioned
If Trump follows through with his campaign promises, then Ford will be stuck in a dilemma regarding its Mexican manufacturing plants. You see, Mexico has more than twice the number of free trade deals than US has. This means that cars can be imported into many more countries with import tariffs waived off from Mexico than US. Obviously , the US market is crucial for Ford but the European market also springs to mind because of its preference towards smaller cars (which are predominantly manufactured in Mexico). In Q3, Ford reported earnings growth in Europe but what few are talking about is that the Brexit fallout is going to hit the company hard over the next few years.
European Growth Would Come Under Pressure
The company will need cheap cars to supply to this region in the years to come which is why I believe western European existing facilities will have to be shut down (probably moved to Eastern Europe) to control costs. However, if Ford comes under big pressure in the US (either from an import tax or new factories), then European growth is dead in the water in my view as the capital won't be there. Then in Europe Ford wouldn't get the new factories it needs to stay competitive which would result in competitors gaining meaningful market share there.
Payout Ratio Could Change Really Quickly
I would urge investors not to get side tracked by the high dividend here. There are just too many risks to the downside in my opinion despite Trump not taking office until January. Dividend investors usually track the payout ratio only which on the surface looks very attractive at present. On a twelve month trailing basis, net income is $7,247 million and dividends make up $2,398 million which gives us a payout ratio of 33.1%. However, income investors should be looking at the share count also which is basically flat for the past 4 years. The recession risk here is also key as Ford has a track record of slashing its dividend when its sales drop meaningfully. This is the problem that fixed costs bring to the table in this sector.(See Also: Is Ford Motor Company (NYSE:F) Stock A Buy Now?)
Ford's management won't be in any hurry for the president-elect to take office. In fact, Ford's timing couldn't have been more off as only two months ago, it announced that all small car production would be moved to Mexico. Unfortunately, now Ford may find out to its own peril how dependent it is on the US market. Trump from afar doesn't look like he is for turning.
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