Why I'm Selling Ford (And You Should Buy It)
Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Note: A previous version of this article inaccurately reported Ford held debt in the amount of $100 billion. Technically speaking, as of 9/31/12 Ford reported over $90 billion in non-current liabilities, only a small fraction ($12.94 billion) appears to be related to automotive debt with the bulk pertaining to its finance division. The article has been adjusted accordingly.
I bought some shares of Ford (NYSE: F) near the bottom of the recession. I'm now looking at a handsome profit. At its most recent trade of $13.72, I've got nearly $5,000 in profit on an investment of about $2,000.
But I'm ready to sell out, and the reason for that may inform your own decision to buy it.
I'm not yet retired, as you may have noticed, and my main investment goal remains capital appreciation. (That and a steadier diet and exercise regimen to put off the retirement day.) I bought Ford for capital appreciation, and I've been handsomely rewarded.
But Ford's future is as a dividend stock, a yield play. The company only recently re-instituted its dividend, at 5 cents per share. But now that's doubled, to 10 cents.
Because F has been down so long, however, even that modest dividend, which comes to 40 cents per year, would still yield nearly 3% at the current stock price. Sterne Agee estimates Ford should earn $1.65/share this year, $1.90 next year, so that dividend is likely to be hiked again, perhaps to 13 cents. The current dividend policy is currently just one-quarter of earnings, a fair ratio, and if things work as they should, a hike next year looks likely.
The other big American car company you can buy today, of course, is GM (NYSE: GM), and it has become a nice company over the last few years, as it has gotten out of Uncle Sam's clutches.
The financial crisis has made these two companies remarkably similar. GM sales are running at about $37 billion/quarter, against Ford's $32 billion, and its net income is about $1.8 billion, against $1.6 billion for Ford.
What GM doesn't have right now is any yield at all. There's no dividend. Thus, if you're buying GM stock today, you're betting that a dividend will happen.
Let's say they go with the same rate as Ford -- 10 cents a share or roughly $1.6 billion/year. But the stock is priced more than twice as high as Ford, so you're looking then at a yield half of what Ford offers. And GM has a rockier earnings history over the last 18 months – offering a dividend is a bigger risk.
So if you're looking for income, Ford is by far the better play. And I no longer think that stock buyers will ever pay a premium for American car assets. If they paid what they're presently paying for Toyota (TM) for instance, shares in GM would be nearly double what they are now, and those of Ford would be over $25. That's just not going to happen. Betting that it will is just a bad bet, a triumph of hope over years of experience.
So if you're buying a car company, you're buying yield. And if you're buying yield, you're buying Ford. Personally, I'm more into capital appreciation, but if you're a yield investor I'll gladly sell you my shares, and we should both do quite well.
DanaFBlankenhorn owns shares of Ford. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!