Ford: Buy the Pullback and Safe Dividend Investment Thesis (NYSE:F)

F’s investment thesis is currently supported by its rich forward dividend yields

We previously covered Ford Motor (NYSE:F) in May 2024, discussing why we maintained our Buy rating then, with the dividend investment thesis still robust and secure. thanks to management’s elevated free cash flow guidance for FY2024.

With the heritage automaker’s diversified offerings continuing to perform well in an inherently cyclical market, we thought it remained well-positioned to survive the slow but sure transition to electrification over the next decade.

F share price YTD

Since then, F has already staged an impressive rally to retest its July 2023 charts, only to moderate sharply after missing the top/bottom double in FQ2’24 performance, despite (again) elevated guidance for FY2024 Free Cash Flow.

Even so, we reiterate our Buy Here rating with the pullback triggering a rise in forward dividend yields, helped significantly by rising hybrid sales.

We will discuss further.

1. F’s dividend yields are getting richer

For now, F raised its FY2024 adjusted free cash flow guidance to mid-range of $8B (+25% YoY) in its recent FQ2’24 earnings call, up from initial guidance of $6.5B in the middle (-4.4% YoY) provided in the FQ4’23 earnings call.

While management has opted to maintain its fixed dividend payout per share at $0.15, we think readers can look forward to fairly generous additional dividends typically announced in FQ4 earnings calls, as it had at $0.65 in FQ4’22 and $0.18 in FQ4. FQ4’23.

Based on F’s dividend policy of returning 40% to 50% of its free cash flow to shareholders, we can see FQ4’24 yielding additional dividends per share between $0.19 and $0.39.

This is based on $599M in fixed dividends paid quarterly and stable shares outstanding at ~4,022M over the next two quarters, further supporting the legacy automaker’s robust investment case.

These projections aren’t too aggressive either, as F previously generated rich free cash flow of $9.08B in FY2022 (+97.8% YoY) and $6.8M in FY2023 (-25.1% YoY ) – with historical payouts (fixed and additional dividends) implying robust shareholder returns at 54.9% and 45.9% respectively.

Advance consensus estimates

As a result of F’s steady guidance, it’s no surprise that the consensus raised its forward estimates moderately, with the automaker expected to generate expanded free cash flow generation at a CAGR of +0.8% through the year fiscal year 2026.

This compares to previous estimates of -0.3% and normalized growth of -8.6% between FY2016 and FY2023, implying the market’s quiet confidence in the automaker’s ability to consistently pay dividends.

The same was seen in F’s improved TTM dividend coverage ratio of 7.26%, compared to 1.23% seen through the end of 2023 and the sector median of 2.66%, further underscoring why investors can simply remain patient during the rather volatile fluctuation. of the automotive consumption trend.

2. Growing hybrids underscore F’s well-diversified automotive offerings

As discussed in our last article, F had a highly strategic car offering on Hybrid, ICE and EV platforms – allowing the legacy automaker to shift its growth levers based on cyclical market demand.

The same has been seen through August 2024, when the automaker reports sales of 16.39 thousand hybrid units (-2.5% month-on-month/+49.8% year-on-year) and 125.46 thousand units on a YTD basis (+49.2% per year), with the accelerated growth of last year. far outpacing YTD ICE Sales at -0.5% YoY and to a lesser extent YTD VE Sales at +63.9% YoY.

This compares to a year ago with YTD hybrid sales of +11.9% YoY, ICEs at +8.3% YoY and EVs at +6.5% YoY.

And this is also why we continue to believe that F stock has been able to perform well on a YTD basis (apart from the impact of FQ2’24 rates), based on the robust electrification trends seen in commercial markets and growth Ford E-transit van sales YTD at 8.07K (+75.8% YoY).

With management already delaying much of its EV investment while targeting +40% year-over-year growth in its global hybrid portfolios from FY2024, we believe the automaker’s hybrid sales would could continue to accelerate during the stagnant electrification trend.

So it’s F Stock A Buysell or keep?

F 5Y share price

With the recent pullback and the stock trading well below its 50/100/200-day moving averages, F’s dividend investment case is even more attractive, with an extended forward dividend yield of 7.12%, compared to 4-year average of 4.44% and sector. median of 2.39%.

This is especially so as the Fed is expected to pivot by 25 basis points at the next FOMC meeting in September 2024, which has also seen US Treasury yields moderate between 3.53% and 5.04% , compared to the peak of 4.95% and 5.51% seen in October 2023.

F being quite volatile in its price movements, traders can also consider swing trades based on established support levels of $9.90 and resistance levels of $13.80 – allowing investors to take advantage of its minimal opportunities growth during an uncertain macroeconomic outlook. .

Accordingly, we reiterate our Buy rating here.

Risk warning

It’s no secret that F has had numerous recall issues in recent years, one that management also commented on during FQ2’24 earnings: “We saw an increase in warranty costs in Q2, of course, related to new technologies, ASF and inflationary pressures on the cost of repair.”

In any case, the withdrawal volume was relatively high at:

• 90.73K Bronco/ F-150/ Edge/ Explorer/ Lincoln/ Nautilus/ Lincoln Aviator units with defective engine intake valves in August 2024,
• nearly 40,000 Bronco Sport/Escape SUVs with faulty injectors in April 2024,
• 1.9 million SUV Explorers due to the risk of flying trim pieces in January 2024 and
• 112.96K F-150 trucks over rear axle bolt issues Jan 2024.

It goes without saying that the F’s recalls appear to outpace total volume sold at 1.4 million vehicles on a YTD basis in the US (+4.4% YoY).

Given these headwinds, it’s also no surprise that management reported the base rate in the FQ2’24 earnings call, with warranty/recall costs totaling $2.3 billion (+53.3% QoQ/ + 43.7% YoY), with the legacy automaker remaining. “the most recalled car manufacturer for the third year in a row”.

Combined with expected future warranty and field service actions higher at $12.55bn in H1’24 (+26.8% YoY), we believe F’s outlook is likely to remain mixed until quality issues are resolved and profit margins improve as a result.

As a result, investors may want to temper their near-term expectations, with the only reason for clarity being expanding free cash flow generation and rich dividends during the ongoing pullback.