Ford faces some serious headwinds, but they are fixable and could open up valuable capital for its dividend strategy.
There are only a handful of iconic automakers, and Ford Motor Company (F 2.50%) certainly makes the short list with its well-known Blue Oval brand. For dividend investors, the Detroit automaker offers a compelling stock, with its share price down 12% over the past year, trading at a price-to-earnings ratio of 11. It has some fixable problems, plenty of cash, and a dividend policy that often includes special dividends.
Here are some other reasons why Ford is a great dividend stock.
Fixable headwinds
One of the first headwinds Ford needs to fix is China. The automaker has consistently lost sales ground in recent years as it’s failed to keep up with the rapid switch to electric vehicles (EVs) — over half of China’s new passenger car sales were EVs in July. In fact, in 2016 Ford sold 1.3 million vehicles in China and in 2022 that spiraled to below 500,000.
With unfilled production capacity, sliding sales, and no way to turn the country into a second pillar of profits as once anticipated, Ford has a problem to fix. The company is thinking a bit out of the box, but the strategy to export vehicles from China is ramping up. Last year, Ford shipped more than 100,000 vehicles from China, which was a record high. During the first half of 2024, Ford’s China exports jumped 45% compared to the prior year, already reaching 75,000.
It might be more of a temporary solution in China currently, but Ford is moving in the right direction and eventually China won’t be a headwind, one way or another.
Another large headwind facing Ford will require a little more patience. Its model e division, which is responsible for electric vehicles, could lose up to $5.5 billion in 2024 alone. Ford has scrambled to refocus its EV strategy, which includes delaying or canceling up to $12 billion of EV investments to try to offset losses and better balance its product offering to consumer demand.
It will take time to turn model e into a profitable division, and Ford has a lot of work to do bringing prices of batteries and other components down. Currently, the company has made a large bet on a low-cost platform aiming at a price tag of $25,000 to lure in mainstream consumers — but whether it will ever be profitable is a real question.
Plenty of cash
Those are two main headwinds facing Ford, and the good news is that both are fixable over time and would open up valuable capital to be spent potentially on dividends. Regardless of the losses racked up in its model e division and the struggles in China, Ford has an excellent balance sheet, plenty of cash and liquidity, and a blossoming high-margin Ford Pro business.
Ford printed $3.2 billion in adjusted free cash flow during the second quarter alone, while boasting a balance sheet with nearly $27 billion in cash and roughly $45 billion in liquidity. One driving force behind these results is Ford’s blossoming Ford Pro division, which generated nearly $2.6 billion in earnings before interest and taxes during the second quarter, more than double its traditional Ford Blue business, which generated nearly $1.2 billion — and far better than model e’s loss of $1.1 billion. Better yet, Ford Pro EBIT margin checked in at 15.1% during the second quarter, compared to Ford Blue’s 4.4%.
Why Ford is a great dividend stock
Investors also have to consider the Ford family, which is well known for loving their dividends. The Ford family owns a separate set of shares that hold special voting rights and dividends, and for that reason the company is always focused on returning value through dividends rather than share buybacks. Ford is also not shy about dishing out supplemental and special dividends when it has extra cash, as it did when it sold off its stake in Rivian and offered investors a juicy $0.65-per-share special dividend.
Ford offers income investors a great opportunity. It is an iconic brand with shares trading cheap, a dividend that is likely to grow as headwinds subside, has a cash-printing high-margin Ford Pro business, and a dividend yield of 5.5%. This is why Ford is a great dividend stock.
Daniel Miller has positions in Ford Motor Company. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
