Portfolio X-Ray: Ford Motor Company

Note: Read this introduction to see what I am doing in this series.

About Ford Motor Company
I think most people know what Ford Motor Company (NYSE: F) does, but as I have done with the previous three entries in this series, I will get the company’s description straight from its most recent annual filing:

“Ford Motor Company was incorporated in Delaware in 1919. We acquired the business of a Michigan company, also known as Ford Motor Company, which had been incorporated in 1903 to produce and sell automobiles designed and engineered by Henry Ford. We are one of the world’s largest producers of automobiles. We and our subsidiaries also engage in other businesses, including financing vehicles.”

Obviously, the company that Henry Ford founded during the early part of the 20th century is much different than the Ford Motor Company of today. The early years of the company focused on the production of Ford vehicles only, at least until the 1922 acquisition of Lincoln.

Though the company only produces Fords and Lincolns these days, it has had many other vehicle brands in its “stable” over the past 100+ years: Mercury, Edsel, Merkur, Jaguar, Aston Martin, Volvo, and Land Rover. Some, like Edsel and Merkur, were just retired after Ford decided not to produce them. Aston Martin and Land Rover were sold at the height (lows?) of the 2008 financial crisis to Tata Motors of India, joining Aston Martin, which was sold the previous year as Ford tried to avoid the bankruptcy and bailout that was looming for General Motors (NYSE: GM). By focusing on its core brands, and by making other critical decisions, Ford was able to escape the fate of GM and Chrysler and emerge from the financial crisis in better shape than its American competitors.

Why I Invested
When I initially added Ford to my portfolio, I did so because I was looking for a dividend paying stock. At the time, Ford had just reinstated its dividend, and it was yielding less than 2%, with only a 12% payout ratio. Since then, not only has Ford’s stock returned around 33% since I purchased it, but the company also doubled it’s dividend at the beginning of the year. The dividend yield is up to 2.5%, and the payout ratio is still below 20%, leaving the dividend with plenty of room to grow.

But beyond that, the reason I ultimately decided on Ford over a company like Microsoft (Nasdaq: MSFT) or Douglas Dynamics (Nasdaq: PLOW) is the leadership at the top. Alan Mulally took over the company as President and CEO in September 2006, not long after the company began to have bond issues because of increasing health care costs for its aging workforce — and pensioners — and an over-dependence on SUV sales at a time when gas prices were near all-time highs.

Mulaly fully implemented “One Ford,” a vision for the company for long into the 21st century. Instead of continuing to build cars that required different car platforms, the company instead focused on unibody platforms, which allowed multiple models to be built on the same frames, reducing production costs.

Shortly after Mulally took over, he raised the company’s borrowing capacity, extending the company’s credit limit to about $25 billion, which would come in handy as the financial markets began to collapse during 2007. Finally, he settled with over 46,000 United Auto Workers union members, giving the company a substantial break in the costs associated with its ongoing retiree health care costs and other labor-related expenses.

These actions prevented a bankruptcy, something that befell GM and Chrysler, prompting a government bailout for “Government Motors” and the bad public relations that came with it. Ford emerged from the financial crisis relatively unscathed, and while the stock traded for under $2 for a time during early 2009, it has since recovered and is poised to continue on its recovery going forward.

When I Would Sell
With a thesis built largely on the leadership of Alan Mulally, I would have to re-evaluate my investment when the next CEO is announced. The succession at the top of Ford has been widely discussed, though the company has announced that Mulally will be with the company through at least 2014, so Ford investors should have at least another year with Mulally at the helm.

As my fourth largest position, I would also consider selling Ford if my position grows too large within my portfolio. Also, should the company decide to reduce its dividend anytime in the near future, I would also have to consider reducing my holding. I don’t think this is very likely, but you never know. Nevertheless, I’ll be keeping an eye on the company and plan on holding it for at least the next few years.

Until next time…

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