Returning almost nothing over the previous 10 years (even when including dividend payments), Ford Motor Company (NYSE: F) has been a fairly pathetic long-term investment. For context, the S&P 500 returned 241% over the similar period, while upstart automaker Tesla grew by 1,100%.
While past performance doesn’t predict the long term, it’ll probably give some hints. Let’s explore what the next decade could have in store for Ford since it seeks to consolidate and improve its business.
The EV boom became the EV bust
Like many legacy automakers, Ford was swept up throughout the much-hyped transition to electric vehicles (EVs), which promised to indicate its lumbering internal-combustion-engine-powered business into something more exciting and modern. But while the company is quickly adopting the brand latest technology, it hasn’t been much of a boon for the underside line.
Throughout the second quarter, Ford’s latest EV segment, Model E, lost $1.1 billion — a staggering $46,000 per vehicle sold. That brings total segment losses to $2.5 billion this 12 months, due partly to an industry price battle as corporations grapple with rising competition and soft demand.
There are several catalysts for the market weakness. For starters, high rates of interest make cars less inexpensive because these big-ticket purchases are typically made with the help of credit. The expected Federal Reserve rate cuts could help the situation. But analysts at J.P. Morgan imagine the U.S. economy has a 35% likelihood of entering recession by 12 months’s end, which may additionally hurt automotive buying demand.
What do the next 10 years have in store?
Over the long term, EV demand seems more prone to bounce back and slowly replace demand for traditional ICE vehicles as battery technology improves and enabling infrastructure like charging stations are built out. Nonetheless, it stays to be unclear what this trend will mean for Ford and other industry participants.
The past few years indicate that EV manufacturing is becoming less profitable. The brand latest technology may also be shifting the automotive industry’s center of gravity to China, where manufacturers like BYD can produce EVs at shockingly low prices because of their vertical integration. BYD’s most cost-effective automotive, the Seagull, sells for the equivalent of $9,700 in China.
While Washington’s 100% tariff rate on Chinese EVs can keep ultra-competitive products similar to the Seagull out of the U.S. market, Ford could face margin-destructive price battle elsewhere on the planet.
Is Ford stock a long-term buy?
If there could also be any silver lining for Ford stock investors, it’ll be the corporate’s money situation. Despite the continuing weakness in its EV business, Ford generated around $2.5 billion in fourth-quarter operating income, which just isn’t too shabby. And it boasts a whopping $25 billion in money and equivalents on its balance sheet.
Not only does Ford find the money for to power through any near-term industry challenges, but it will possibly even have plenty left to return to investors. The company is assumed for implementing special dividends as a component of its plan to distribute 40% to 50% of its free money flow to investors. And shares boast a dividend yield around 5.8% on the time of this writing.
That said, dividends don’t mechanically make a stock an outstanding investment — especially if the share price stays flat or declines. The S&P 500 returns an annual average of 10% over long periods and Ford looks unlikely to top this in the next decade, even with its massive payout. The company faces too many serious long-term challenges to be considered a buy.
Do you have got to speculate $1,000 in Ford Motor Company immediately?
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JPMorgan Chase is an promoting partner of The Ascent, a Motley Idiot company. Will Ebiefung has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends BYD Company, JPMorgan Chase, and Tesla. The Motley Idiot has a disclosure policy.
Where Will Ford Stock Be in 10 Years? was originally published by The Motley Idiot