Ford announced its earnings after market close last night, and there wasn’t much to note. The company is in the midst of a massive restructuring after years of pretty mediocre execution in the auto sector.
In the summer of 2018, the stock took a big hit. Ford has struggling businesses around the globe, while its North American business remains really strong – driven mostly by its success with the dominant F-truck line.
When the stock hit the $10 level, it got on my radar. At $10, the stock has a 6% dividend yield. I bought some of the stock in late July and again in late August. So far, the stock has continued its slide and I’m down on the position. You can see the chart below along with my buying entry points.
I’m still hanging on to the stock for a few reasons. First, I think you can find value in multi-year turnaround stories. The Ford business has been bleak, and the stock has been punished accordingly. While the market gets impatient with the lack of delivered results, management has always made clear that this is a multi-year effort.
Second, Ford has the oldest cars on the market. In the next year or two, the vast majority of Ford’s vehicles will be refreshed which should lead to a bump in sales. Third, management seems to be making hard decisions and will likely exit unprofitable businesses and double down on quality businesses.
Lastly, the dividend is substantial. At the current stock price of $8.34, the dividend yield is 7.19%. Some are worried that the dividend is cut, but I don’t think that will occur. Ford’s balance sheet is in decent shape, and a dividend cut is typically last resort.
So, where is this going? For me, this is an interesting example of buying a high dividend stock that has been beaten down as a result of going through a major transformation of their business. The bull case here is that over the next three years or so, Ford gets its business on much better footing and the stock heads into the $15 range. In the meantime, you collect a healthy dividend that reinvests. In this scenario, I’ll probably sell the stock and put the proceeds into index funds (I have a long term goal of exiting much of my individual positions and moving toward a cleaner, three-fund-ish portfolio).
The bear case here is a recession occurs in a year or so taking away any benefits from Ford’s internal turnaround and the stock continues to suffer maybe heading toward $6 a share. This value trap type scenario would mean that whatever cash you collect from the dividend isn’t enough to make up for the loss of capital. In this scenario, I will probably hold the stock and let the dividend reinvest at some pretty low valuations.
A middle-of-the-road scenario is that the stock bumps back into the $11-12 range over a couple years while paying out a nice dividend. In this scenario, judging the success of it basically just depends on what the overall market is doing. It could be that in this scenario, this money is still underperforming the broad market.
I’ve been anticipating lower broad market prices in 2019 (despite the recent move upwards). In this scenario, it’s not out of the question that I add Ford shares if it goes lower. Currently, the stock is pretty smack dab in the middle of its recent trading range. If you want to pick up shares, consider waiting for sub $8 prices.
Dividend investing, to me, is both something I find very interesting, and also something I think can get overrated. Often the high dividend companies are the most mature companies with minimal growth prospects. My strategy is only to pick up dividend companies if they have been beat up a bit. This means locking in a higher yield and a possible value opportunity. Buying “fully valued” dividend stocks seems like a waste to me. I’d rather put that money in index funds.
I’ll continue to update readers on this strategy as the Ford story unfolds.