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Why Ford Motor Company's Fat 5.4% Dividend Is a Big Problem

By John Rosevear - Jun 20, 2017 at 8:04AM

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The Blue Oval's big payout is worrisome -- but not for the reason you think.

At current prices, Ford Motor Company's ( F -3.67% ) dividend yield is nearly 5.4%. That's huge. It's also a problem.

The problem isn't that Ford can't afford the dividend: Ford's payout is quite reasonable given the company's strong profitability over the last few years. The problem is that despite the strong profits, Ford's stock hasn't rewarded its investors. The high dividend yield is the result of Ford's low valuation.

Now, to be clear, there are legitimate reasons Ford is valued at just 7 times its expected 2017 earnings, versus the multiple of 10 or so that we'd expect for a healthy automaker. But right now, things are changing at Ford in ways that could boost its valuation -- and that "problem" could be an opportunity for a patient investor.

A 2018 Ford F-150 pickup on a construction site

Ford's huge-selling F-Series pickups have generated big profits over the last few years. But those profits could get squeezed if and when the market slows. Image source: Ford Motor Company.

Why Ford is cheap

There are a few reasons why Ford's valuation is so low. Some are shared with other automakers, and a few are unique to the Blue Oval.

Wall Street is concerned about the big automakers as a group for a couple of reasons. First, the U.S. new-car market is a huge driver of profits for Ford and many of its rivals, and signs are mounting that the U.S. market has passed its cyclical peak. Those signs started to appear early last year, and they've become more pronounced recently.

That has implications for Ford's profit margins: When year-over-year sales growth is hard to come by, some automakers resort to heavy discounts to try to "steal" additional sales. That leaves companies like Ford with a difficult choice: cut prices to match, giving up per-sale profits -- or lose sales.

Analysts are also concerned about the threat of disruption from new technologies and business models that could leave some of the big automakers behind -- or completely upset the traditional idea of car ownership. But Ford has stepped up to that challenge, boosting its investments in self-driving technology, electric vehicles, and new urban mobility businesses. It's still a concern, but less so for Ford than for some other automakers.

A white Ford Fusion sedan with self-driving sensors on a suburban street

Ford has stepped up its investments in autonomous-vehicle technology, and now has a large fleet testing on public roads. Image source: Ford Motor Company.

But that leads us to two Ford-specific concerns: Under now-retired CEO Mark Fields, Ford's investments in those future technologies were high. That wasn't bad in and of itself. But Ford failed to make the expected payoff clear to investors. There were also signs that Fields was prioritizing future tech over investments needed to keep Ford's current products competitive with aggressive rivals.

At the same time, there were concerns that despite its big investments, Ford wasn't moving as quickly as some rivals -- notably General Motors ( GM -2.15% ), which has a highly visible self-driving development effort and already has a long-range electric car in production.

Why Ford might not stay cheap

Those Ford-specific concerns appear to be why the company's board of directors ushered Fields into retirement last month and appointed Jim Hackett to replace him. Hackett, the former Steelcase CEO who is well-regarded in tech circles, plans to move quickly to sharpen Ford's current business, streamline decision-making, and accelerate Ford's adoption of new technologies and business models. He has already revamped the top of Ford's organization, putting several key executives into new, expanded roles.

Jim Hackett, standing before a soft-focus Ford logo

Jim Hackett became Ford's CEO last month. The tech-savvy Hackett was previously CEO of Steelcase. Image source: Ford Motor Company.

It's still very early and Hackett hasn't yet spelled out his plans in detail. But if he's successful -- and his track record and early moves inspire confidence -- then a strong profit-growth story for Ford should come into clear focus. If so, Ford's stock will almost certainly gain value.

Why it could be worth buying now and waiting

It might take a while -- perhaps a few years, even -- before investors buy into and reward whatever long-term growth plan emerges under Hackett. But to come full circle, there's a good reason to buy now, while Ford is still cheap: that fat dividend.

CFO Bob Shanks has explained in considerable detail why he thinks Ford's current dividend is sustainable through a recession. The dividend is a high priority at Ford: It's how the Ford family, which still controls the company through a special class of shares, gets paid. Ford has shown that it won't hesitate to cut the dividend if it's necessary to keep the company afloat. But as long as it can reasonably fund payments, it will.

Long story short: Ford's "problem" is looking more and more like an opportunity for investors. If you buy Ford now while it's cheap, reinvest that steady dividend, and stay patient, you might be quite happy with the results in a few years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Ford Motor Company Stock Quote
Ford Motor Company
$19.14 (-3.67%) $0.73
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General Motors Company
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