There’s a lot of doom and gloom surrounding Detroit automakers right now. The automotive industry is capital intensive; consumers aren’t adopting electric vehicles (EVs) quickly enough to justify the billions of investment into fleets of EVs and battery technology; and Chinese automakers are on the brink of entering the lucrative U.S. market.
Despite all the pessimism surrounding Ford Motor Company (NYSE: F) and the broader industry, the folks at the blue oval still have a lot going for them. Here are three big reasons to buy Ford stock now.
Overlooked business
When investors think of Ford, they generally picture large trucks and SUVs. That’s fair, especially considering that’s what Detroit autos do best. But what many investors overlook is just how lucrative its commercial business is.
In fact, Ford Blue, which is what investors consider its historical internal combustion engine business, generated $7.46 billion in earnings before interest and taxes (EBIT) during 2023. But right behind that segment was Ford Pro. Ford’s commercial business, which includes its popular Transit vans, generated a surprising $7.22 billion EBIT.
Here’s the kicker: Ford Pro generated better margins than Ford Blue and grew its revenue at a higher rate. Ford Pro’s EBIT margin checked in at a much healthier 12.4% compared to Ford Blue’s 7.3%. (The latter is pretty standard for the mainstream automotive industry.) Furthermore, Ford Pro’s revenue grew 19% compared to the prior year, a much faster rate compared to Ford Blue’s 8% revenue growth.
What’s intriguing about Ford Pro going forward is that its software subscriptions increased by nearly 50% from the prior year, and orders for mobile repairs more than doubled. Ford Pro is a crucial part of Ford’s investment thesis and will only continue to become more important for profits in the future.
Improving ROIC
Another thing many investors overlook is Ford’s target for improving return on invested capital (ROIC). While Ford Blue and Ford Pro are thriving, the company’s Model e — its electric vehicle business — is far from thriving.
In fact, Model e lost roughly $4.7 billion in 2023 alone. But management is tightening up its operations, reducing costs, and postponing roughly $12 billion in planned spending on EV production capacity. As Ford improves its operating efficiency, it plans to improve ROIC from about 14% in 2023 to 20% over the next couple of years.
In a highly capital-intensive industry, the improvement to ROIC shouldn’t be overlooked and will also play a large role in improving Ford’s investment thesis.
Strong dividend
Investors simply can’t form a Ford investment thesis without considering its healthy dividend. Ford declared a first-quarter regular dividend of $0.15 per share, making its forward yield almost 5%. It gets better, though. Ford also announced a supplemental dividend of $0.18 per share — a cherry on top for investors.
What’s even better for investors is that the company is targeting distributions between 40% and 50% of adjusted free cash flow. Speaking of cash flow, Ford’s adjusted free cash flow checked in at $6.8 billion in 2023, far better than it’s outlook of $5.0 billion to $5.5 billion, ensuring the dividend and supplemental potential remain strong going forward.
Is Ford stock a buy?
While the automotive industry can make for challenging investments, Ford is a great income story with its strong cash flow, 5% dividend yield, and reoccurring supplemental dividends. Plus, with the pessimism surrounding EV investments right now, the company trades at a modest 11 times price-to-earnings, leaving investors with an opportunity to pick up shares fairly cheaply.
Should you invest $1,000 in Ford Motor Company right now?
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Daniel Miller has positions in Ford Motor Company. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
3 Reasons to Buy Ford Stock Now was originally published by The Motley Fool