It’s a tough road for Ford (NYSE:F). After years of rising sales, helped by the robust global economy and consumer demand, the world’s second-largest automaker is now facing powerful headwinds.
The automotive landscape is changing fast. Sales are slowing globally and the future for the traditional automakers looks uncertain when disruptors such as Tesla (NASDAQ:TSLA) and Google’s Waymo have entered the market.
To deal with these challenges, Ford announced last year a company-wide $11 billion restructuring plan over more than five years as sales in both Europe and Asia slowed and both regions swung to losses.
Struggling operations in Asia and Europe prompted Ford to cut its 2018 profit forecast. The company posted close to a 50 percent decline in earnings for the second quarter, followed by a drop of more than 35 percent in the third quarter.
The latest move in its restructuring came Thursday when the company announced it will cut thousands of jobs, weed out slow-selling variants of particular models and potentially close entire factories in Europe.
The company, which employs some 54,000 workers across the region, mainly in Germany, the UK and Spain, will also review its joint venture in Russia.
Steven Armstrong, Ford’s head of Europe, said in a conference call:
“There’ll be significant impact across the region...This isn’t a one- or two-year issue. We have had periods of profitability but not on the level it should be.”
Investors Are Fleeing The Stock
As Ford undertakes this massive restructuring exercise to improve profitability and get ready for an era where electric and driverless cars will rule, investors haven’t shown much faith.
After plunging over 33 percent during the past one year, Ford stock has traded below $10 a share since the summer amid concerns about the sustainability of its generous $0.15-a-share dividend.
This pessimism is more pronounced in the debt markets, where Ford’s debt has been trading close to junk after Moody’s Investors Service cut the carmaker’s credit rating to one step above junk in August. The stock traded below $8 late last year for the first time since November 2009, the year its Detroit peers General Motors (NYSE:GM) and Chrysler (NYSE:FCAU) went bankrupt.
Investors are finding it hard to get behind the restructuring plan when the global growth cycle is turning and the company is fighting multiple challenges, including slowing sales growth in China and higher steel costs in the US after its trade disputes.
Ford Has The Cash To Defend Its Payout
Despite this dismal situation, there is a little reason to believe that Ford is descending into a full-blown financial crisis where it will be forced to cut its richly-yielding dividend of around 7 percent anytime soon.
That extreme scenario is already built into the current valuation, but we don’t think that it will play out. Instead, Ford has entered a phase where its bottom line will remain depressed for the next several years, but its profits won’t be completely wiped out as many bears are predicting.
To defend its $0.15-a-share quarterly payout, Ford has more than $18 billion in cash. That is enough money to sustain new product development and the dividend during times of distress.
If you include short-term investment, the company has access to more than $36 billion in liquidity. With such fluid assets, Ford has the financial wherewithal to defend its payouts.
There is no doubt that Ford’s core automobile division isn’t generating sufficient cash to cover its dividend, but the company's financial services segment typically generates around $1.5 billion per year for the parent company.
The credit unit had its best quarter since 2011 in the latest earnings period, generating $678 million in profit on rising resale values of leased vehicles it sold at auction.
Bottom Line
We believe Ford’s plans for restructuring are solid and can improve future profitability. The automaker plans to stop selling traditional sedans in the US over the next few years. It also intends to update virtually all its existing crossover, SUV, and truck models as well as introduce several new models in each category.
This should eliminate a long-standing source of losses, while boosting profitability at Ford's North American division.