- When it comes to dividend investing, I only invest in stocks with obvious competitive advantages. Ford in my opinion does not have one.
- F-series truck sales have now declined for 2 months in a row. New trend developing?
- Technically the chart looks ugly. Until we take out existing 2016 highs, this stock will be off my radar.
I have been neutral to bearish on Ford Motors (NYSE:F) stock for quite some time now. With the stock trading at $12.67 a share, Ford has been consistently in a downtrend since 2014, and I for one don't see the trend reversing. The "story" throughout the back-end of 2015 and the start of 2016 had been that the excellent results Ford was reporting in the US were not being reflected in the stock price. The non-performance of the share price despite multiple bumper quarters has spiked the dividend yield to 4.74%. Moreover, the yield is even higher in real terms as the company announced a special dividend to the tune of $1 billion. The aim again was to attract more investors.
However, with August US auto sales coming in lower than the same month in 2015, I believe we are finally seeing signs of the cycle turning in this sector. Bulls will state that a SAAR of over 17 million each month for the rest of the year is still well above average numbers and this may be so. Nevertheless, we know that the market is always projecting figures at least 6 months out. The industry boasted an average SAAR of 18.2 million in the US in the final months of 2015 which was significant. However, apart from the annualized selling rate, there are more reasons to be wary of being long Ford stock at this stage.
Not Enough Competitive Advantages To Protect The Stock From An Industry Downturn
One of the main reasons why Ford stock never interested me from an income standpoint was because the company doesn't have clear competitive advantages over its competitors. We have already seen this with companies like Hyundai being able to take a big market share from western manufacturers over the past decade or so. Who is to say that more such cheaper competitors won't come onto the scene in the near future?
Furthermore, the auto industry is cyclical, meaning that if you mistime your entry into the stock, your position could be underwater for years. We can see this already in how the markets are pricing this stock. 2015 was a bumper year for Ford but the stock stayed stagnant as the market was sniffing out a top in auto sales. Therefore, the perceived slowdown in auto sales that has finally come to the US may be already priced into the stock. However, do you want to take this risk for the high dividend on offer? I choose to pass.
Ford's Major Competitors In Trucks Also Posted Declines In August
Furthermore, if we are looking for a bellwether product line to judge how Ford is going at present, I would pick the F series pick up trucks. This product line dropped by 6.1% in August and also dropped a tad in July so I'll be watching this area with interest in September. Why? Well, while some analysts believe that current retooling of plants to prepare for aluminium body panels has affected pickup sales, I beg to differ. In fact, if you look across the board in August, General Motors also lost ground in pickups with its Silverado, and Chrysler also seeing double-digit declines in its Ram pickup.
Is The Switch To Aluminium Over Hyped?
Therefore if Ford's main competitors in this space gained share in pickups in August at the expense of Ford, I would say August's decline was only a hiccup but they didn't. The F-series is critical for Ford as the move to the Aluminium shell should mean more profitability, especially over smaller cars. However, the profitability will only come in spades if the demand is there. Secondly, I just believe there is too much bullish talk about the Super Duty model and the profits that are predicted to come from it. Ford believes it has an advantage here as it was the first major manufacturer to move to a lighter model which improves efficiency. Furthermore, Americans continue to turn away from sedans to trucks, which on the surface looks bullish for Ford. Personally though, I keep coming back to demand. Watch US SAAR figures on a monthly basis as these numbers will really tell you where the industry is going.
Ford Stock Continues To Make Lower Lows
Technically, Ford has been making lower lows since mid 2014. The stock is up almost 2% since the 2nd of August. However, the only way Ford is going to overcome the technical damage inflicted on the stock in February is to break out to new fresh 2016 highs. Until Ford stock can start producing higher highs once more, the risk remains too big to go long in my opinion
To sum up, many investors will continue to be attracted to Ford stock because of its generous dividend. However, buying a stock because of yield is a fundamental mistake. In fact, despite Ford's recent good run, a deeper look at its fundamentals over a 10 year period would surprise may investors. I'm still sticking to my assumption that there is more downside risk than upside reward here.
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