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At its meeting last week, the Federal Reserve cut its benchmark lending rate by a whopping 50 basis points. Fed Chair Jerome Powell said that he does not see a recession or a downturn on the horizon. His comments signal that the Fed still expects a soft landing for the U.S. economy, which - coupled with the central bank's forecast for additional rate cuts - would suggest a potential 'Goldilocks' scenario for markets.
The Fed’s rate cut cycle, even if it might not be as aggressive as the tightening cycle between 2022 and 2023, is a positive for dividend stocks, which lost some of their appeal as investors found high yields in debt instruments. Now, as fixed-income yields come down due to the Fed’s rate cuts, those craving regular income from their investments might turn back to dividend stocks.
Car Sales Might Gain Momentum After Fed’s Rate Cuts
Rate-sensitive names, and especially those in the real estate and automotive sectors, also stand to benefit from lower interest rates, as they spur demand for high-value goods like homes and cars that consumers usually buy on loan.
Incidentally, an Edmunds survey showed that 62% of car buyers are holding back on their car purchases due to high interest rates – so it's likely that the Fed’s rate cuts eventually push some of these holdouts into dealerships to scout for a new car.
Given the expectations for a Goldilocks economic outcome, I find Ford (F) stock to be a name worth betting on. The stock not only trades at attractive valuations, but its dividend yield of 5.5% places it among the top 10 dividend stocks in the S&P 500 Index ($SPX). Here’s the investing thesis behind Ford stock, along with the risks and opportunities that investors should be aware of.
Ford Stock is Cheap for a Reason
Ford, along with fellow Detroit giant General Motors (GM), is among the cheapest stocks in the S&P 500 Index, and trades at a next 12-month (NTM) price-to-earnings (PE) multiple of just 5.3x. But then, Ford stock has been trading at similarly dismal multiples for quite some time now, and if anything, has been getting even cheaper.
PE multiples tell us how much investors are willing to pay for every dollar a company earns. While Ford has been generating healthy profits – it expects to post adjusted pre-tax profits and adjusted free cash flows of between $11 billion and $8 billion at the midpoint, respectively, in 2024 – growth has been scarce for the legacy automaker. Since investors pay for growth, something that Ford has been struggling with, they have been shying away from the stock, which shows up in its single-digit PE multiples.
Notably, Ford could have been generating even fatter profits if not for its loss-making Model e segment, which produces electric cars. The segment reported a pre-tax loss of $4.7 billion last year, and Ford expects those losses to widen to between $5 billion and $5.5 billion in 2024.
Ford has revamped its EV strategy and 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.
Ford’s internal combustion engine (ICE) and commercial business, meanwhile, are performing remarkably well. Ford’s focus on hybrids is also expected to pay off, as that’s one segment that is showing good traction - even as electric vehicle (EV) sales have sputtered.
Overall, the investing rationale for Ford revolves around the fat profits in its legacy business, expected improvement in its EV business, strong position in hybrids, and last - but definitely not least - its tepid valuations.
Key Risks That Ford Investors Need to Watch Out For
That said, there are several risks that investors should watch out for. First, inventories in the U.S. auto industry are now at an elevated level, and companies might need to offer price incentives to sell these, which could pressure their margins.
Second, while a soft landing looks like the base-case scenario, a recession can’t be fully ruled out - and given its cyclical nature, Ford stock could bear the brunt, in the event of a downturn.
Third, while Ford and its Detroit peers struck a labor deal last year, its labor woes are far from over, and the Tool & Die Unit at its River Rouge Complex that assembles its hugely popular and profitable F-150 pickups has warned of a strike over local contract issues.
Finally, despite CEO Jim Farley’s transformation efforts, Ford continues to battle legacy issues related to recalls and warranty costs. Recently, it recalled thousands of F-150 and Maverick pickups. What was troubling is that these are recent models (2022-2024), so they can't be brushed aside as “legacy” issues.
All of that said, while Ford faces several headwinds, I believe that they are more than captured in its depressed stock price. For someone looking to play the base-case possibility of a Goldilocks economy after the Fed rate cut with a high-yield dividend stock, Ford would fit the bill.
On the date of publication, Mohit Oberoi had a position in: F , GM . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
