Is This Underperforming Deep Value Stock a Buy for Its 5% Dividend Yield?

Despite the current unease surrounding market valuations, certain individual stocks emerge as attractive propositions for investors seeking deep value. Ford (F) stands out as a compelling choice, trading at mid-single-digit price-to-earnings (PE) ratios and boasting a generous 5% dividend yield, significantly surpassing the average S&P 500 Index constituent.

While Ford has faced challenges in the market – with a 3.9% decline in 2024 amidst record-high indexes – its history reflects a broader struggle, shedding over 30% in the past decade.

The automotive industry witnesses turbulent times, especially for legacy players like Ford and General Motors (GM), who invested heavily in electric vehicle (EV) infrastructure only to confront weaker demand realities.

Ford’s EV arm, Model e, suffered a substantial pre-tax loss of $4.7 billion in 2023, with each EV sold costing the company over $40,525. This trend is anticipated to worsen in 2024, symbolizing a stark contrast to the profitability in segments like Ford Blue and Ford Pro.

Amidst stagnant profits and concerns about reaching peak legacy business profitability, the looming shadow of the EV price war initiated by Tesla exacerbates the apprehensions in the investor community.

Although Wall Street analysts portray a cautious stance on Ford stock, forecasting a “Moderate Buy” sentiment, there’s a glimmer of hope in the form of price targets. The mean target price stands at $13.80, showcasing an 18% increase from the recent closing rates. In contrast, the ambitious Street-high target of $21, as per Bank of America, suggests an uplifting 79% surge.

Trading at a modest next 12-month PE of 5.9x, Ford’s valuation discrepancy garnered attention during the Q1 earnings call. CEO Jim Farley attributed this to industry-wide EV losses, underscoring Ford Pro’s unexplored strength and resilience. Ford’s strategic roadmap involves enhancing hybrid capabilities alongside gasoline and electric offerings to adapt to evolving market demands.

While GM opts for share buybacks, Ford prioritizes dividends, signaling its intent to distribute 40%-50% of free cash flows to investors, supplemented by special dividends.

Despite Ford’s subdued price trajectory, the stock holds promise as a deep-value gem awaiting reevaluation. Investors can relish the robust dividend yield alongside the prospect of additional special dividends, reflecting Ford’s commitment to returning capital to shareholders amid ongoing market dynamics.