- Ford stock is down more than 12% after reporting an earnings miss and disappointing July sales numbers.
- Ford currently has a dividend yield of 5% and is likely to maintain its dividends in coming quarters.
- Ford stock is currently trading at a historically cheap valuation.
On 28th of July Ford Motor (NYSE:F) came out with its Q2 earnings which sent the stock crashing. While the company had managed good revenue growth, it missed on earnings (with net profit declining 9% YoY) and to make the matters worse its CFO Bob Shanks warned about the difficulty in meeting the yearly target in the face of a slowing economic environment. The stock tanked more than 8% following the earnings. A few days later Ford released its July sales data which didn’t paint a good picture of the company either. July sales declined by 3% sending the stock even lower. Ford stock is more than 12% down since the earnings release and more than 14% down YTD (Year-To-Date).
The chief cause for the decline in the net profit was a record rise in incentives. While one of the main reason for such a steep increase was unusually low incentives in the same quarter last year, investors are still worried. With the slowdown in automobiles sales, some investors fear that incentives are likely to remain, negatively impacting the margins. Ford was forced to hike its incentives after its competitors like GM increased their incentives to boost sales in the slowing market. In a dog eat dog market, profitability is always the first casualty.
While there are certainly causes for concern, all is not lost. The steep fall in stock price has made the stock attractive on many fronts.
Very Attractive Dividend Yield
The decline in the stock price has sent Ford’s dividend yield soaring to around 5%. Ford declares a quarterly dividend of $0.15 resulting in an annual dividend of $0.6. And considering that Ford’s dividend payout ratio is around 30%, the dividends are likely to continue. Ford generates enough cash to cover both the dividends and stock buybacks while maintaining its capital expenditure.
In the latest quarter, Ford’s operating cash flow stood at $7.7 billion while its dividend outgo was at $595 million and capital expenditure was $1.6 billion. The company generated around $6 billion in free cash flow in the latest quarter. And even if the economy hits a rough patch, Ford has more than $39 billion in cash and marketable securities to keep the dividends going. So from an income investor's perspective Ford stock looks a good buy.
Ford is currently trading at a PE(ttm) of 5.4 which is much lower than its recent average (five-year average is 12.3). While certainly the July sales were bad and the near-term outlook is not great either, analysts expect Ford to grow at 8% CAGR over the next five years. Ford is currently trading at a forward PEG of 0.7, which makes the stock pretty attractive.
According to tipsRank, the average 12-month target price for Ford stock is $14.5, which is 20% higher than today's (5th August) trading price of $12.08. Yahoo Finance has a one-year price target of $13.53 which is 11% higher than the current price. Even if we take the Yahoo Finance's price target, after including the dividends, Ford stock is likely to return 16% in the next one year.
One good news emerging out of Ford's Q2 earnings was its European operations. After losing billions of dollars in Europe in the last decade Ford seems to have managed a turnaround. Ford managed to post an impressive profit of $470 million. While it is certainly a small fraction in comparison to its North American operations, it will cushion the impact of any slowdown in the American market. Ford is planning to cut costs and launch newer models to sustain its last quarter margin of 5.8%.
Ford stock has been battered after the recent decline in sales and miss on earnings in the latest quarter. And the near-term outlook is also not very positive from the growth perspective. However, the recent crash has compressed Ford's valuation, making the stock very attractive. It has also sent the dividend yield to a high of 5% which is very enticing to an income investor. And considering that Ford generated $6 billion in free cash flow in the last quarter, the stock definitely deserves a second look. With an average price target of $13.53 and 5% in dividend yield, Ford is likely to return around 16% in next one year. Ford stock has an average buy rating from Wall street.