Ford Motor Company (F) has been lagging behind its crosstown rival General Motors Company (GM) this year. While GM’s stock has soared 30%, Ford’s has only managed a 5.6% gain. This underperformance is a head-scratcher for many analysts, considering both companies are experiencing similar sales growth and are aggressively pursuing the electric vehicle (EV) market.
The key difference lies in capital allocation strategies. GM has showered shareholders with stock buybacks, repurchasing a staggering 30% of its total market value. Ford, on the other hand, has remained committed to dividends, prioritizing consistent payouts over a splashy buyback program.
Dividend Power vs. Buyback Blitz
This contrasting approach has significant implications for shareholder returns. While buybacks can artificially inflate share prices in the short term, dividends provide a steady stream of income. Ford’s current plan distributes 40% to 50% of annual free cash flow as special dividends, potentially leading to additional payments of up to $2.60 per share over the next three years. This represents a 20% increase on top of the existing quarterly dividend.
However, the market seems unconvinced. Ford’s stock price remains depressed, down 16% over the past year. Analyst Mike Ward of Freedom Capital Markets believes the company needs to do more than just pay dividends. He argues for a more holistic approach to total shareholder return (TSR).
Profitability and Quality: The Missing Pieces
One area Ford needs to improve is profitability. While operating margins have grown in recent years, they still lag behind GM’s. Ford is taking steps to rectify this by slashing $2 billion in costs, with a focus on quality control. Higher warranty expenses compared to competitors are eating into profits. Addressing this issue could add another $1 billion to $2 billion to the company’s annual operating income.
Ford Pro: A Hidden Gem
A bright spot for Ford is its Ford Pro division, catering to commercial customers. This segment boasts a healthy 16.7% operating margin, raising questions about a potential spin-off or IPO. While a separate listing is unlikely, Ford Pro’s success story can reassure investors about the company’s ability to generate profits even during economic downturns.
Electric Vehicle Ambitions: Balancing Growth with Profitability
Ford’s EV division, Model e, remains a work in progress. While the traditional car business and Ford Pro are profitable, Model e is currently bleeding cash. The company needs to find the right balance between aggressive EV investment and achieving cost efficiency. Trimming the capital expenditure budget for 2024 is a positive step in this direction.
Looking Ahead: A Potential Turnaround
A potential recovery in the auto market could also provide a tailwind for Ford. Analyst John Murphy of BofA Securities projects industry sales to peak around 2028, with Ford gaining market share during this period. Coupled with a more disciplined capital allocation strategy and improved profitability, Ford’s stock price could be poised for a significant rebound.
Investor Takeaway
Ford’s recent underperformance presents an opportunity for investors with a long-term perspective. The company’s commitment to dividends, cost-cutting initiatives, and a focus on total shareholder return position it for future success. While challenges remain, particularly in the EV segment, Ford appears to be making the right moves to close the gap with GM. Investors should keep a close eye on the company’s progress in improving profitability and executing its EV strategy.