Ford Stock: Set for Life or a Bumpy Ride?

Investing in Ford stock today could potentially set you up for life, but it's not without its risks. Ford, an iconic American automaker, has been around for over a century, yet its recent performance has been far from reassuring. In the past two decades, Ford investors have seen their capital rise by just 55%, lagging behind the S&P 500's 647% return. So, is Ford stock a wise choice for long-term investors, or is it a bumpy ride into the sunset?

Ford's recent troubles are well-documented. In the second quarter of 2024, the company reported a 9% year-over-year decrease in net income, missing Wall Street forecasts. Higher-than-expected warranty costs due to quality issues with its vehicles weighed heavily on profits. While there was an improvement in the third quarter, the problems have not fully abated.

Ford's transition to electric vehicles (EVs) has been a rocky one. Its EV division, Ford Model e, posted a cumulative operating loss of $3.7 billion through the first three quarters of 2024, offsetting the operating income registered by its legacy auto division. The company has had to delay or push back $12 billion in planned EV-related investments and capital expenditures, including the construction of a battery plant in Kentucky.

The auto industry is mature and has low growth prospects, making it difficult for Ford to meaningfully increase its top line. According to consensus analyst estimates, Ford's revenue in 2026 will be only 0.8% higher than 2024's projected total. Ford's average quarterly operating margin in the trailing-10-year period was a mere 2%, and its return on invested capital was a dismal 1.8%. These metrics suggest a company that is very capital-intensive without producing a sufficient payoff.

Despite these challenges, Ford's capital-return policy offers a hefty dividend yield of 5.27%, which can provide a steady stream of income for investors. However, Ford's dividend hasn't made up for the poor performance of the stock, which has dipped 27% in the past 10 years. The company's economic moat, which protects its competitive position, is also weak, making it difficult for Ford to achieve significant growth.

So, what's an investor to do? Buying Ford stock today might seem like a gamble, given the company's recent struggles and the automotive industry's mature and competitive nature. However, for long-term success, investors can consider the following strategies to balance potential risks and opportunities:

1. Buy and Hold: Ford's stock is currently undervalued, trading at a price-to-earnings ratio of 7.1, which is a significant discount to its trailing three-year average. This adds potential upside for investors who remain patient and hold the stock for the long term.
2. Diversification: Incorporate Ford into a diversified portfolio to mitigate risks. This way, if Ford underperforms, other investments can help offset the loss.
3. Income-focused Investing: Ford's high dividend yield of 5.6% can provide a steady stream of income for investors, making it an attractive option for those seeking a reliable passive income.
4. Wait for a Dip: Ford's stock has been volatile in recent years. Investors may want to wait for a pullback before entering a long position. Keep an eye on the company's earnings reports and news releases for opportunities to buy at a lower price.
5. Monitor the EV Transition: Ford's success in the electric vehicle (EV) market will be crucial to its future. Keep track of the company's EV initiatives and demand for its electric vehicles to gauge its prospects in the growing EV market.

In conclusion, investing in Ford stock today is a gamble, but it could potentially set you up for life if you play your cards right. By adopting a patient, diversified, and income-focused approach, investors can navigate the risks and opportunities associated with Ford's stock and increase their chances of long-term success.