After Ford's Big Dividend Increase, Is the Stock a Buy?

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In late January, Ford (NYSE: F) announced it had doubled its shareholder payout, from a previous nickel per share to its current level of 10 cents a share paid quarterly.  The announcement meant that Ford’s dividend was now at its highest level since before the financial crisis.  Usually, dividend increases are a great way for a company to demonstrate the health of its business.  On the contrary, however, the company’s most recent quarterly results spooked the market, sending its stock down 5%.  Therefore, which signal regarding Ford is the correct one?

The Automotive Rebound

Ford is the largest publicly traded auto maker in the United States, with a $50 billion market capitalization that is slightly higher than its closest competitor General Motors (NYSE: GM).  Investors interested in the automotive industry may prefer GM to Ford on the basis of a few valuation metrics.  GM appears to be slightly cheaper, with a forward price-to-earnings ratio of 7 compared with Ford’s forward P/E of 9.  Furthermore, GM and Ford are trading at price-to-book ratios of 1.5 and 2.8, respectively.  Unfortunately for GM investors, the company suspended its dividend upon its reorganization, and has not resumed dividend payments since its return to trading publicly in 2010.

Japanese auto manufacturer Toyota (NYSE: TM) has a market value bigger than Ford and GM combined, at roughly $150 billion.  Toyota’s shares navigated the Great Recession and the subsequent recovery better than Ford and GM.  The stock is nearing the levels it was trading at in 2007 and 2008.  In addition, Toyota performed very well over the first six months of 2012.  Net revenues during the period increased 36% versus the prior year.

Ford’s European Problem

There’s no doubt that Ford doubling its dividend payments is a good sign.  At current prices, the stock yields 3%.  However, the market was far less pleased when the company announced its European losses would widen this year.  Previous expectations were for a loss slightly exceeding $1.5 billion, and the company announced those losses would be closer to $2 billion.  Last year’s losses in Ford’s European segment totaled $1.75 billion, so clearly the market was expecting progress, not regress.  As a result, the company’s shares had its worst day in seven months.

Reasons for Optimism

On the other hand, the company announced fourth-quarter sales and earnings above estimates.  Ford reported net income of 40 cents per share.  In addition, total revenues increased 5.5% for the fourth quarter year over year.  Ford’s growth stands in clear contrast to GM’s operating results during the first nine months of 2012.  Automotive sales were essentially flat for GM during the first three quarters year over year, and operating income dropped 15% during the period as a result of higher costs.  The company will announce full-year results in mid-February, and investors would be wise to keep a close eye on the company’s progress.

With regard to Ford, I’m less concerned with the market’s reaction to the ongoing difficulties in Europe than I’m pleased with the company’s growth in revenues and the huge dividend increase.  Share price movements are a far littler concern to me than the underlying performance of the company.  It wouldn't surprise me at all to see Ford drop further given the market's tendency to overreact to short-term news.  Should shares continue to fall, Ford will become a clear value opportunity.  I will soon be placing the company on my watchlist.

Robert Ciura has no position in any stocks mentioned. 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!

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