In March 2022, the Federal Reserve embarked on one of its most aggressive rate-tightening cycles. Since then, markets have been jolted by several false hopes around an expected policy “pivot” to rate cuts. However, while the U.S. central bank has long since stopped its rate-hike spree and kept its benchmark steady for a year, a rate cut has been elusive.
However, at the annual Jackson Hole Symposium earlier this month, Fed Chair Jerome Powell virtually set the table for a rate cut at the next meeting in September by saying, “The time has come for policy to adjust.” That’s perhaps as close as Powell could have come to directly suggesting a rate cut is likely at the upcoming Federal Open Market Committee (FOMC) meeting.
Which Stocks to Buy When Interest Rates Fall?
The expected fall in U.S. rates – which should be followed by further global monetary policy easing – is positive for several stocks. First, growth names stand to benefit, as lower interest rates make their future cash flows more valuable in current dollar terms. Incidentally, many growth stocks peaked in early 2022 ahead of the Fed’s tightening cycle.
Second, rate-sensitive names, and especially those in the real estate and automotive sectors, stand to benefit from lower interest rates, as they spur demand for high-value goods like homes and cars that consumers usually buy on loans.
Finally, as interest rates start falling from peaks, some investors might find dividend stocks alluring. These stocks lost some of their appeal as investors found high yields in debt instruments, but as fixed-income yields come down, those craving regular income from their investments might turn back to dividend stocks.
Ford Offers a Dividend Yield of Over 5%
Detroit giant Ford (F) has a dividend yield of 5.4%, which is around four times that an average S&P 500 Index ($SPX) constituent pays. Notably, while both Ford and General Motors (GM) are posting healthy cash flows, their capital allocation policies have diverged.
Ford intends to return between 40%-50% of free cash flows to shareholders, and over the last couple of years, its payout has been towards the upper end of that range. The company has also topped up the regular dividend with a special dividend for two years amid stellar free cash flows.
It paid a special dividend of 65 cents per share in 2023 after it sold its stake in electric vehicle (EV) startup Rivian (RIVN). Ford paid a more modest 18 cents per share dividend earlier this year, but it is still significant given its low stock price, which is barely in double digits.
General Motors, on the other hand, has a dividend yield of just under 1% - which is even lower than the S&P 500 Index. However, GM has been on a share buyback spree, and last year announced a mega $10 billion buyback. Earlier this year, it announced yet another $6 billion buyback. To gauge the magnitude of GM’s share repurchases, consider the fact that its market cap is just about $54 billion.
F is a Dividend Powerhouse
Ford has been a dividend powerhouse ever since it reinstated its dividend in late 2021, after having suspended it in the previous year due to the COVID-19 pandemic.
The company generated free cash flows of $6.8 billion in 2023, and during the Q2 earnings call, management raised its 2024 adjusted free cash flow guidance by $1 billion to between $7.5 billion-$8.5 billion.
Going by Ford’s dividend payout strategy, not only does the 2024 dividend look safe, but investors can also expect a special dividend next year - even though I would prefer the company to do a buyback, instead given its tepid valuations.
Ford Stock Trades at Depressed Valuations
Ford is trading at a next 12-month (NTM) price-to-earnings (PE) multiple of a mere 5.7x. That said, while the multiples might look mouthwatering at first glance, the stock’s valuation has been depressed for quite some time now, as markets worry that its internal combustion engine (ICE) business is near peak profitability. The stock has been out of favor with investors, and is underperforming the markets in 2024.
Notably, Ford’s EV business is losing money, and last year the segment’s pre-tax loss was a whopping $4.7 billion. The company expects the segment’s losses to widen to between $5 billion-$5.5 billion in 2024.
At the same time, Ford has fine-tuned its product strategy, and will no longer produce the 3-row electric SUV that it was previously targeting. It has further cut its EV capex, and expects it to account for around 30% of total capex, down from the previous 40%. The company is doubling down on hybrids, whose sales have been relatively strong compared to pure-play EVs, as even market leader Tesla (TSLA) reported a YoY fall in first-half deliveries.
In its EV portfolio, Ford is working on a low-cost model, as well as models for commercial customers. The company has set a goal of achieving pre-tax profitability on new models within the first year of launch.
Should You Buy Ford Stock?
While CEO Jim Farley has been trying to turn around Ford, the company faces some legacy issues, especially related to warranty and labor issues. Its labor issues were well-illustrated by last year’s United Auto Workers (UAW) strike, while a flurry of recalls and warranty costs have been a drain on its earnings, including in the most recent quarter.
All of that said, despite its woes, I find Ford stock to be a good buy. First, its valuations are too cheap to ignore, especially given the elevated broader market valuations. Second, while Ford’s turnaround is taking longer than expected, I believe it’s on the right track under Farley’s leadership. The company has positioned its portfolio to capture demand across ICE, hybrids, and EV cars, which looks like a good strategy given the slowdown in U.S. EV sales. Finally, with the expected monetary policy easing, names like Ford should find favor with investors - with its over 5% dividend yield being a cherry on the top.
On the date of publication, Mohit Oberoi had a position in: F , GM , TSLA , RIVN . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
