2023-10-19 08:00:00 ET
Summary
- Ford had negative FCF in 2022 and is expected to have negative FCF in 2023 due to higher CAPEX.
- The company continues to face headwinds from the UAW along with a looming recession in the near future.
- The company has had a shaky dividend track record in the past, and could be at high-risk of cutting or suspending its dividend.
- Due to their valuation, investors with high conviction in the stock could be getting a great bargain.
Introduction
Ford (F) motor company is an American automobile brand and global icon when it comes to cars & trucks. The company has been around since the early 1900's and is the second largest automaker behind General Motors (GM). The company was a powerhouse in its early days and have a 120-year history which showcases the businesses' staying power.
They IPO'd in 1956, but since implementing a dividend their track record has been less than stellar. As a dividend investor, many look to brands like Ford, who have staying power and long histories when looking to invest in dividend stocks. Because of their names and staying power, these companies are often considered safe investments for the long-term. But past performance doesn't always predict future performance. In this article, I discuss why I think dividend investors should consider staying away from Ford stock right now.
Recent Controversy
One thing the automaker and several of its peers have been facing recently is the United Auto Workers (UAW) union ongoing labor force negotiations. The UAW has been on strike since September 15th and this has taken a toll on the automaker, with 8,700 workers walking out on the company's largest, and most profitable plant in Kentucky. Ford has tried to reach an agreement with the UAW but the organization still wants to negotiate terms.
The automaker has stated it plans to increase wages more than 20% over four years, add additional paid holidays, and increased cost of living allowances, but this has still not been met with satisfaction. Analysts expect this to have a $120 million impact on the company in the upcoming quarter. The UAW has also stated that they want retirement security union jobs at EV battery plants in the near future. Ford's CEO has recently called for an end to talks but the UAW doesn't seem to want to budge leaving the company frustrated, and in limbo.
#1 Reason Not To Buy/Cash Flow Issues
Over an 8 year period noted in the chart below, Ford had an average operating cash flow of $16.8 billion, while capital expenditures averaged $7 billion. This means the automaker had an average of nearly $10 billion in free cash flow over the same period.
So what happened last year? In 2022, net income was a -$1.9 billion and free cash flow was negative as well. Operating cash flow was $6.85 billion while CAPEX was $6.8 billion. Operating cash flow dropped nearly 60% from $15.7 billion in 2021. Part of this was due to supply chain issues. This caused the company to leave about $2 billion in profit on the table. Another reason was because of elevated costs from the rapid rise in interest rates.
A third reason was the $5.9 billion they took from the government in 2009 during the GFC that was due in full amount by June of last year. Ford has been paying this amount back in installments over a 10-year period, from 2012 to 2022 with $8 billion paid by 2019. Even though this loan is paid in full now, what if rates are to remain higher like many are saying, how will this impact the business going forward? Perhaps the company will need another bailout?
2023 Expectations
During the 1H of 2023, Ford has done much better than the year prior. Not only did they beat analysts' estimates on EPS and revenue, but in Q1 revenue was up 20% from year-end while FCF was up $1.3 billion from the negative year the company had in 2022 at $700 million. But is 2023 really better? The company also accepted a conditional loan of $9.2 billion earlier this year for EV production. EPS was also up 66%. But despite all of this, the company is still expected to produce negative cash flows for the year.
In Q2 F did much better with revenue increasing almost $1 billion from $41.5 billion to $42.43 billion. Earnings also grew 14.2% from $0.63 to $0.72 quarter-over-quarter while FCF grew the most at over 300% from $700 million to $2.9 billion over the same period. And while this is great growth, Ford is still not out of the woods yet and is still expected to face headwinds going forward.
This is because FCF is expected to be in the range of $6.5 billion to $7 billion while capital expenditures are expected to exceed at $8 billion to $9 billion for the full-year. EBITA also declined in Q2 but management stated this was due to a one-time insurance payment and expects this to improve in the second half of the year.
#2 Reason Not To Buy/Shaky Dividend Coverage
I'm sure most readers know most companies that pay dividends, pay this from growing cash flows. And while companies face headwinds or some slowdowns, Ford is going on their second year with negative FCF. Maybe this is why Seeking Alpha states Ford is at high risk of cutting its dividend? That would be my guess.
The company also hasn't had the best dividend track record since it started paying one. They were forced to cut the dividend in 2020 during the pandemic and re-instated it at the end of 2021. Since 2022, the dividend has been stagnant at $0.15 and has never been higher since year 2015. Furthermore, the company was forced to cut the dividend prior to the Great Financial Crisis and was re-instated 3 years later.
I understand F is a reputable company and probably one of the most well-known brands in the world; I mean their motto is "Ford Tough" but as a dividend investor, I like to see a more stable dividend track record. How will XYZ company do during economic downturns? This is usually one of the first things I check when looking into dividend stocks. And although their past doesn't predict how companies will do when they face headwinds in the future, this does give you some confidence going forward. This leads me to my next question.
#3 Reason Not To Buy/Looming Recession & Debt
With a recession on the calendar for 2024 or 2025, one big question shareholders should have is "How will Ford do if we enter into another recession?" One can't help but wonder "If they cut and/or suspended the dividend before during tough times, will they do it again?" And with the expected higher for longer environment, how will a company whose debt has been increasing fare? Especially one that has had trouble in the past and are facing headwinds currently.
As you can see the company's debt load significantly increased from 2012 to 2020 growing from $105 billion to $143 billion. It is to be noted that they have managed to decrease this by more than $30 billion over the last 3 years from $175 billion in 2020. They also have been growing cash this year from $26 billion in Q1, which was up $5 billion from 2022, to $30 billion in July. Additionally, they had a total of $47 billion in liquidity at the end of Q2.
Reason It Could Be A Buy/Valuation
One reason that makes the stock a possible buy is its cheap trading price currently. Because of it, some might argue that Ford's risk is worth the reward. Although the company price is up slightly from October of last year, the stock is down from a close of $15.22 on July 12th, 2023 to the current $11.72 at the time of writing. Their trailing P/E is currently higher than peer GM's 4.1x, but lower than the consumer discretionary average of 12.4x.
If investors believe in Ford's long-term outlook, and think the stock can get back to even half of the price it was trading in the early 1990's, then they may be getting the stock at a great valuation. The stock also has a forward P/E of 7.1x, in-line with its 5-year average of 7.5x. Analysts currently have the stock a moderate buy with a price target of $15.14, about 25% upside from here.
Me personally I don't think the stock offers any margin of safety to make it a buy and I wouldn't consider it at this price. Using the Dividend Discount Model and Seeking Alpha's 2024 dividend estimates, I have an intrinsic value below analysts' price target at $8.71.
Risks
F faces several risks. The company still has dealings with the UAW and a parts & labor shortage. Additionally, the company laid off about 600 employees last month at its Michigan assembly plant, and had an additional 8,700 workers walk out of its Kentucky plant, both connected to the UAW strike. And although the automaker did see some progress with its labor efforts in Canada , it continues to be a roadblock in the United States.
I'm assuming both parties will eventually come to an agreement. But this will most likely cause the company major headwinds and affect cash flows going into 2024 & 2025. Throw in a recession, conditional loan, and a higher for longer environment, another dividend cut or suspension could be on the horizon for the company.
The company announced today, October 18th, a series of organizational changes for its Ford+ growth plan . This new industrial structure is said to unleash growth and value for the business going forward. I will be watching Ford closely over the next few quarters, specifically how they deal with the UAW, the $9.2 billion dollar loan from the US Department of Energy, and how their sales & cash flows will be impacted.
Investor Takeaway
Ford is a globally recognized brand that has been around since the early 1900's. But as with any business, the company has faced headwinds over the years and I expect this to continue going into 2024. With a recession looming and a deal with the UAW yet to be reached, investors looking to start a position in F may be catching a falling knife. FCF is expected to be negative in 2023, similar to 2022, and although financials have improved in the 1H of '23, 2024 seems to be shaping up to be similar. They company also has a significant amount of debt on its balance sheet and a higher for longer environment will only add to the seemingly long list of problems for the automaker. Investors looking to add should keep an eye on the stock in the coming quarters. Due to expected headwinds and a recession, I rate the stock a hold for now.
For further details see:
Ford: 3 Reasons Why This Dividend Stock Is Not A Buy And 1 Reason It Could Be