Ford Motor Company's (NYSE:F) stock price has been stagnant this year as short-term investors headed toward the door after 2014 was labeled a building block for a stronger business in 2015 and beyond. Ford's turnaround since the recession has been nothing short of impressive and will be discussed in business classes in the decades to come, and despite the stagnant stock price recently, the folks at the Blue Oval continue to return value to shareholders.
Ford has accomplished this mainly through its reinstated dividend, but yesterday, it made an additional move to return value to shareholders: share repurchases.
Ford recently reported that its automotive operating-related cash flow reached $1.2 billion in the first quarter with its automotive gross cash topping $25 billion. Ford's automotive gross cash also exceeds its automotive debt by nearly $10 billion, and its automotive liquidity improved to $36.6 billion.
As Ford continues to improve its cash generation, it has been able to take further actions in reducing its automotive debt, increasing its dividend, and now buying back shares.
Ford announced it will repurchase up to 116 million shares of Ford common stock, which is worth roughly $1.8 billion. Ford's share repurchases will offset the effect of potential conversions of the company's 4.25% senior convertible notes due Nov. 15, 2016 as well as share-based employee compensation granted this year. This move will reduce Ford's diluted shares by about 3% and will have a small effect on increasing earnings per share.
"These actions are consistent with our overall capital strategy to take anti-dilutive actions and position ourselves to further reduce Automotive debt," said Bob Shanks, executive vice president and CFO, in a press release. "The strength of our cash generation gives us confidence to take these actions to enhance shareholder returns..."
While Ford's announcement is clearly a positive one, it's not a large enough buyback to merit an increase in fair value estimates. That said, I believe this could set the stage for the company to announce larger buybacks in the future, as I believe Ford's stock remains undervalued, and its automotive liquidity is very strong.
In addition to its recent share repurchase announcement, Ford continues to grow its dividend, which also returns value to shareholders.
Ford's dividend pays out $0.125 per share quarterly for a total of $0.50 per share annually. At today's price, that's roughly a yield of 3.1%, which compares very favorably to Japanese rivals Toyota and Honda, which check in at around 2.2% and 1.2%, respectively. Ford's dividend yield trails only cross-town rival General Motors, but that's mainly because GM's stock has suffered a pullback in its stock price amid its massive recall debacle this year.
Ford is tackling its most aggressive vehicle launch schedule in company history this year, which will set the company up for much stronger top-line revenue growth throughout the rest of this decade. Looking at Ford's bottom line, the automaker is expanding aggressively in the world's largest automotive market, China, and remains on track to reverse billions of losses in Europe next year.
Ford's dividend payout ratio is only about 30% of net income, which easily leaves room for increasing the dividend in the future. That's especially true as its operations become more profitable overseas. Ford's recent share buyback announcement could be just the beginning of management's ability to return more value to shareholders via an increasing stock price, dividend, and share buybacks.
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Daniel Miller owns shares of Ford. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.