2023-10-25 09:00:00 ET
Summary
- Ford Motor Company's aggressive plans and investments in EVs have left them at the mercy of the UAW, creating a lose/lose situation.
- The UAW's demands, including workers at the new EV battery facility being included in the contract, are unrealistic and out of Ford's control.
- Ford's upcoming earnings report is a no-win situation, as beating expectations will embolden the UAW and missing expectations will not rally the stock. Dividend cut is also likely.
Executive summary
Ford Motor Company ( F ) went "All-In" on America and Electric vehicles, E.V.s, specifically at just the wrong time. That is the primary problem the maker of the Model T faces presently. CEO Jim Farley's aggressive plans and capital expenditures regarding new facilities for manufacturing EVs in the U.S. has left Ford at the mercy of the United Auto Workers Union, the UAW.
What's more, the tremendous investment in EVs, especially at the battery plants, which are a huge stumbling block for the negotiations, puts Ford in a lose/lose situation going forward in my eyes. Hence, the title "Mission Impossible." The first thing that came to mind when I thought of Ford's current prospects for a positive outcome was the Tom Cruise " Mission Impossible " movies. Unfortunately, Farley is no Tom Cruise. In the following sections, I will lay out the primary reasons why Ford stock remains a strong sell.
The UAW amps up the pressure
Latest Statement by UAW President Shawn Fain
X
Many have been pontificating that a deal may be near. I don't think so. This recent statement by UAW President Shawn Fain tells me the union is not going to budge. The problem is that many of the demands by the UAW are not even within the grasp of Ford management. This primarily has to do with the "non-compensation" type demands. The demand by the union that the workers at the new EV battery facility joint ventures need to be included under the auspices of the new contract is a non-starter for Ford. In fact, General Motors ( GM ) CEO Mary Barra said during the company's third quarter investor call Tuesday:
"Discussions to include battery plant workers "under the scope of the national agreement" remained open, but said the current focus is for workers at the joint venture, known as Ultium, to negotiate their own deal with the union."
So the union is asking for something the Ford management team has no control over. This demand cannot be met. The next major issue for Ford shareholders is the upcoming earnings report on October 27th . I see this as basically a lose/lose scenario for shareholders. Here is why.
Earnings report a "No-win" situation
Here is the set up. If Ford beats earnings expectations and states they have had a profitable quarter, that will only serve to embolden the UAW. They will say... see, Ford is doing great... they should share the wealth, we deserve our "fair share." In fact, this is exactly what they did say when GM reported Q3 earnings on Tuesday. According to a report:
"The United Auto Workers union on Tuesday expanded its strike against General Motors to a highly profitable full-size SUV plant in Texas - a swift response to healthy profits and record third-quarter revenue for the automaker.
The Tuesday strike escalation includes roughly 5,000 workers at GM's Arlington Assembly plant, which produces the Cadillac Escalade and Escalade ESV, GMC Yukon and Yukon XL, and Chevrolet Tahoe and Suburban SUVs.
The walkout came just hours after the automaker reported third-quarter earnings results that beat Wall Street's expectations.
"Another record quarter, another record year. As we've said for months: record profits equal record contracts," said UAW President Shawn Fain in a statement. "It's time GM workers, and the whole working class, get their fair share."
This not only helped make the UAW's case, the union also announced a new strike on one of GM's most important and highly profitable full-size SUV plants in Texas. This is why it's a lose/lose scenario for Ford shareholders.
Good news is bad news and bad news is bad news. If Ford comes out and states they beat on the top and bottom lines, you can bet your bottom dollar the UAW is going to inflict more pain. If Ford comes out and misses on earnings and blames the union strikes as the reason, I don't see the stock rallying on that news, either. I see no reason to be holding Ford stock into earnings. The next point I want to make is the fact I see the dividend at major risk of being suspended or cut completely.
Dividend cut squarely on the table
Let me start by saying the Seeking Alpha Quant team is warning a dividend cut could be imminent with an F rating based on Quantitative metrics. See chart below
Seeking Alpha Dividend Quant Safety Grade F
Seeking Alpha
The Quant team states :
"Ford Motor Company ((NYSE:F)) has displayed warning signs that have historically led to dividend cuts. The company has a Dividend Safety Score of F. Over the past 11 years 64.4% of stocks with an F rating did cut their dividend."
So, 64% of companies the Quant team has a F rating on end up cutting their dividend. On top of this, Ford just suspended their dividend in 2020. See below.
Seeking Alpha Ford Dividend history
According to a report from 2020 regarding the dividend cut:
"Ford said that it would suspend its dividend and withdraw its 2020 guidance as the company tries to shore up its cash amid the coronavirus pandemic.
"Like we did in the Great Recession, Ford is managing through the coronavirus crisis in a way that safeguards our business, our workforce, our customers and our dealers during this vital period," Ford CEO Jim Hackett said in a statement. "As America's largest producer of vehicles and largest employer of autoworkers, we plan to emerge from this crisis as a stronger company that can be an engine for the recovery of the economy moving forward."
I see no reason why they wouldn't do it again.
The final point I want to make on this topic is if Ford confirms they plan to continue paying a 5% dividend to shareholders, this will be taken as a slap in the face by the UAW. At this point, I see Ford announcing a suspension of the dividend, at the very least, to bolster their position that they can't pay the UAW what they are asking. This would be a shrewd move by Ford management. Now let me bottom line this piece for you.
The bottom line
This is a "no-win" situation for Ford shareholders. If Ford comes out with great earnings, the UAW will simply use that positive information to apply more pressure on Ford. Moreover, I see the risk of the dividend being eliminated at nearly 100%. The current situation appears even more dire than the reason they cut the dividend in 2020. In 2020, they weren't sure of the outcome. Today, Ford knows they are going to take a hit to the bottom line one way or another.
The bottom line is Ford loses no matter what happens. If Ford can't come to an agreement with the UAW, the automaker will continue to lose more and more profits by the day as their major profit centers remain shut down. Additionally, all the recent investments in EV battery and vehicle production plants may be all for naught, as the company may have to abandon their EV high hopes.
The final straw is "if or when" Ford does eventually come to an agreement with the UAW, the company is not going to be cash flow or profit positive. EPS is going to take huge hit regardless. Additionally, you can bet all the grand plans for EVs and other future capital expenditures are going to be completely revisited. This will cause guidance to be cut as well, which is even more important than current earnings.
I expect Ford will suspend the dividend and guidance at the upcoming earnings announcement due to uncertainty regarding the UAW strike resolution. At this point, I see this as "Mission Impossible" for Ford, and Tom Cruise is nowhere to be found. Those are my thoughts on the matter, I look forward to reading yours.
For further details see:
Ford: Mission Impossible