Shares of Ford Motor Company (F +0.00%) are experiencing some positive momentum. As of Jan. 30, they have climbed 4% in 2025. This shows that investors are growing a bit more optimistic before the business reports fourth-quarter 2024 financial results on Feb. 5.
Ford shares currently trade around $10, which is still 29% below their 52-week high from last July. Does this mean it's a top auto stock to buy right now?
Why you should consider Ford
One reason you might consider buying Ford is its Pro segment, which has proved that selling vehicles, software, and services to commercial customers can be very lucrative. Revenue jumped 9% year over year in the third quarter (ended Sept. 30), and it has an operating margin of 11.6%. These two figures are much better than the overall business' numbers.
At the moment, Ford shares might also be able to satisfy income-seeking investors. The current dividend yield of 5.83% is more than four times greater than the average of the S&P 500. Receiving a sizable payout every quarter for doing absolutely nothing is an enticing proposition.
Why you should avoid Ford
Ford's positive attributes are overshadowed by what I believe are very worrying characteristics. This is especially true for investors who want to own companies for five to 10 years.
The company's growth potential leaves much to be desired. First, it doesn't help that global passenger vehicle sales don't increase by much on an annual basis. What's more, Ford's market share in the U.S., its key market, has trended downward over the past decade. That's not an encouraging sign.
One hallmark of the mass-market auto industry is that there are huge capital requirements. Ford is no different. It must spend sizeable amounts of money on research and development, factories, marketing, and labor. Even with these cash outlays, which are minimum requirements to maintain its industry position, Ford continues losing market share.
Large expenses and capital expenditures have typically resulted in poor profitability metrics. In the past 10 years, Ford's operating margin and return on invested capital have averaged a troubling 2.2% and 2.6%, respectively.
NYSE: F
Key Data Points
Demand can also be cyclical. Cars are usually the second biggest purchase a consumer makes during a lifetime. When economic times worsen, households will do whatever they can to extend the usefulness of their existing vehicles, as opposed to buy a new car. This exposes Ford to broader macro forces beyond its control.
All the above provides support for the argument that Ford does not possess an economic moat, which is one of the most important factors I try to identify in a potential investment. There is so much competition in the industry, from both domestic and international rivals, that it's impossible for Ford to develop a lasting advantage.
A poor track record
In addition to the negatives about Ford that were just described, there is the company's disappointing track record when it comes to taking care of its shareholders. The numbers speak for themselves.
In the past decade, Ford has generated a total return, which includes that hefty dividend, of only 14%. This means a $10,000 investment made back then would be worth just $11,400 today.
During the same period, the S&P 500 has produced a total return of 263%, a gain that would have nearly quadrupled your starting capital. Looking ahead, I'd much rather own the broader index than Ford shares. That's why investors should avoid the automaker even though it trades at $10 per share right now.
