Although the S&P 500 has taken a dip in the past few weeks, its trailing-12-month total return of 12.4% is still a positive trend. The same can't be said of all stocks, particularly Ford Motor Company (F +2.94%).
Even including dividends, the Detroit automaker's shares would've lost 11.5% of your starting capital in the last year (as of March 18). What's more, they trade significantly off their peak price. However, maybe things are about to turn around.
Should investors buy this auto stock right now? It's worthwhile to understand the bull and bear cases before making a decision about Ford.
Good for income investors
Ford is a consistently profitable enterprise. This benefits shareholders directly because management allocates these excess earnings toward dividend payments. In 2024, Ford paid $3.1 billion in dividends. And as of this writing, the dividend yield is a meaty 6.03%.
With the overall market trading at what many consider to be a historically elevated valuation, investing in a stock that can earn sizable income can certainly be enticing to some people. That's a key part of Ford's bull thesis.
Another positive factor requires looking underneath the hood. One of Ford's lesser-known segments, Pro, sells commercial vehicles, software, and services to business customers. It has been a standout performer for the company, growing revenue 15% in 2024, while at the same time posting a solid 13.5% operating margin.
The leadership team touts this division's ability to drive recurring revenue. Subscriptions jumped 27% last year. "And we are just getting serious about repair of the vehicles," CEO James Farley highlighted on the Q4 2024 earnings call in February.
The valuation might also be a reason to scoop up Ford shares. The stock trades at a price-to-earnings ratio of 6.8. That represents a roughly 30% discount to the trailing-three-year average. Should market sentiment toward the company improve, there is upside.
NYSE: F
Key Data Points
Is Ford a high-quality business?
One clear reason investors might be discouraged from buying Ford stock is because of its growth prospects. This is an extremely mature business that operates in a very mature industry. According to the European Automobile Manufacturers' Association, global auto unit sales increased by just 2.5% in 2024 compared to 2023. And according to the International Energy Agency, volume worldwide was only 12% higher in 2022 than in 2010.
This partly helps explain why Ford's revenue hasn't budged much over time. Its revenue grew by 28% between 2014 and 2024. Consensus analyst estimates believe the top line will rise at a compound annual rate of 0.3% over the next three years. That's not an exciting outlook.
Ford is also a very capital-intensive company -- it has huge expenses. For example, the business spent a whopping $158 billion on cost of sales in 2024, which includes materials and labor. It has also been dealing with elevated warranty costs recently. Additionally, Ford must invest heavily in research and development and manufacturing capabilities just to maintain its current competitive position.
Low growth and a capital-intensive business model lead to weak profitability metrics. Ford's operating margin and return on invested capital in the past decade have averaged 2% and 2.3%, respectively. There's no reason to expect these two numbers to go up over time. The auto industry is incredibly competitive while also being cyclical, which introduces a major headwind to Ford building a durable economic moat.
So is Ford a buy?
Taking all the positive and negative factors into account, the bearish case is much more compelling. Buying Ford stock could make sense for income investors thanks to the 6% dividend yield. However, for those trying to outperform the market over the next five years, Ford likely isn't a smart choice for your portfolio.
