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Can buying Ford stock today be a lifetime guarantee?

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Can buying Ford stock today be a lifetime guarantee?

Over the past twenty years, investors have Ford (NYSE:F) have seen their starting capital increase by only 55% (as of November 25). For comparison: the S&P500a benchmark for measuring the performance of stocks in general, has generated a total return of 647% over the same period.

Clearly, Ford has not positioned itself as an effective tool for building wealth. But maybe the future will be different. Could this be Detroit car stockthat has lagged the broader market over the past twenty years, and made investors for life?

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Ford has been around for over 100 years. However, don’t be misled by that long history. This company is facing some serious issues that investors should be aware of.

In the second quarter of 2024 (ending June 30), Ford reported net income of $1.8 billion, which was not only down 9% year over year, but that figure was also significantly above Wall Street expectations. The reason for the disappointment was higher than expected warranty costs due to vehicle quality issues. There was an improvement in the third quarter, but the problems are still weighing on profits.

The industry’s shift towards a more sustainable future has led to heavy investment by car manufacturers to sell more electric vehicles (EVs). Ford’s strategy is no different. However, the progress to date in building a financially viable EV segment has been nothing to write home about.

Through the first three quarters of 2024, Ford’s Model e, which houses the company’s EV business, posted a cumulative operating loss of $3.7 billion. This effectively offset the bottom line of Ford’s old auto division. The leadership team simply doesn’t see demand as strong enough as it had initially hoped. It also doesn’t help that the market is extremely competitive.

It’s a good idea to take a step back and understand that Ford has unfavorable traits that reduce the chances of adequate long-term returns. Here are some things potential investors should keep in mind.

To start with, the automotive industry is very mature, with low growth prospects. The number of passenger cars sold worldwide in 2022 was only 12% higher than ten years earlier. The muted unit growth doesn’t provide a strong backdrop for Ford to meaningfully increase sales. According to analyst consensus estimates, the company’s 2026 revenue will be just 0.8% higher than the projected 2024 total.

Profitability is also nothing to get excited about. Ford’s quarterly results operating margin averaged only 2% over the past ten years. And the return on invested capital of 1.8% shows an organization that is very capital intensive without generating sufficient returns.

Owning companies that have a economic moat is a key factor that can increase your portfolio’s chances of success. These profitability figures make it easy to argue that Ford lacks sustainable competitive advantages. For example, if it had a strong brand or had cost advantages, Ford’s bottom line might be much higher than it is today.

The one bright spot I can identify for investors is Ford’s capital return policy. Over the past nine months, the company has paid out $4.4 billion in dividends, with the current yield sitting at a hefty 5.27%. This can provide a steady stream of income that may be attractive to certain investors.

However, that dividend does not compensate for the poor performance of the stock, whose price has fallen 27% over the past ten years. I see no reason for the company to reward its shareholders even close to a comparable investment in the broader S&P 500. And I have no confidence that Ford can set up its investors for life.

Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.

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  • Nvidia: If you had invested $1,000 when we doubled in 2009, you would have $350,915!*

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We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.

See 3 “Double Down” Stocks »

*Stock Advisor returns November 25, 2024

Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Can buying Ford stock today be a lifetime guarantee? was originally published by The Motley Fool

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