One of America & # 39; s most trusted brands – Ford Motor Company (NYSE 🙂 – has been on a downward movement for several years. Shares from the second largest automaker have always had a negative return over the past five years, thereby missing out on the strong rally in stock markets that caused shares of many consumer shares to rise.
The stock recorded $ 8.78 per share on Friday, a decrease of nearly 21% from $ 10.86 a year ago. One of the consequences of this long-lasting bearish spell and something that strikes Ford is the very attractive dividend yield, which is now almost 7%. To put this in context, compare it with the average return of 1.93%.
Is the dividend safe? In general, a company that offers a higher return than the market average is seen as a sign of danger. Investors are looking for a discount to own shares that are considered riskier. So does investing in Ford shares make sense for investors looking for a stable dividend income?
Major turn in execution
It was a tough road for Ford. After many years of rising sales, aided by the robust global economy and consumer demand, the automaker is now facing a powerful headwind: it is undergoing a reorganization of $ 11 billion after its net income fell by more than half last year as the demand for his sedan cars & # 39; s delayed. The turnaround consists of canning thousands of paid jobs, closing factories abroad and building capacities for the production of electric and cars without drivers
The company steps out of smaller car markets and focuses on SUVs and trucks in the United States, while accelerating its efforts to quickly enter the electric and self-driving vehicle markets. Last month it announced it would spend $ 900 million to build driverless and electric cars at its Flat Rock plant south of Detroit.
While Ford undertakes this huge restructuring exercise to improve profitability and prepare for this new era, investors have not shown much confidence. The stock has traded less than $ 10 since last summer, amid concerns over the sustainability of its generous $ 0.15-a-share quarterly dividend.
Analysts have built in a possible scenario in which Ford's creditworthiness could be lowered quickly and the dividends drastically lowered if the company's pay-as-you-go plan fails to produce results. The reluctance of the car manufacturer to offer guidance for 2019 further fuels these fears.
"There is certainly a lot of value to be buried in Ford shares, although we are in no hurry to buy them with still high market uncertainty (witness management's reluctance to provide specific guidance) and heavy lifting still necessary to remove barriers to better performance, "Bank of Montreal analyst, Richard Carlson, said after the end of last month the company's Q1.
"We remain cautious with the shares because we believe that new money that is being introduced into the car today should be sent to companies that already have a profit moment."
Despite Ford's serious attempt to combat changing consumer trends and technology, it becomes difficult to become enthusiastic about the high dividend yield. We believe that the strategy of the company to finance the transformation to a modern car manufacturer through the sale of SUVs and large trucks is risky.
Consumers will quickly avoid these expensive vehicles if the economy becomes sour or gas prices continue to rise at the pump. A similar combination forced Ford to eliminate its dividend in 2006, which it resumed in 2012 after it turned out to be the only Detroit car manufacturer going through the global recession without resorting to a government-backed bankruptcy
Another reason why we believe traditional car manufacturers are a less attractive investment option is a growing consumer trend where rattling is becoming a new standard, eliminating much of the need to own a car.
The market appreciated Lyft Inc. (NASDAQ :), the second largest trip tuning service in the United States, not far behind Ford in last week's IPO. The enthusiasm of investors about Lyft, which does not have large car factories, is a big indicator for the future.
Bottom Line
It is difficult to see growth coming back to Ford quickly. The automotive industry is undergoing major changes that continue to put pressure on Ford & # 39; s income, free cash flows and its share price. For investors with a long-term income, it is better to wait on the sidelines and follow how their reversal is changing.
