In the past two decades, investors in Ford (F -0.40%) have seen their starting capital rise by just 55% (as of Nov. 25). For comparison's sake, the S&P 500, a bellwether to gauge the performance of stocks overall, has generated a total return of 647% during the same time period.
Clearly, Ford hasn't panned out as an effective wealth-building vehicle. But maybe the future will be different. Could this Detroit auto stock, which has lagged the broader market in the past 20 years, set investors up for life?
Recent troubles
Ford has been around for more than 100 years. However, don't let that long history fool you. This business is facing some serious problems that investors need to know about.
In the second quarter of 2024 (ended June 30), Ford reported net income of $1.8 billion, which was not only down 9% year over year, but that figure significantly missed Wall Street forecasts. The reason for the disappointment was due to higher-than-expected warranty costs as a result of quality issues with vehicles. There was an improvement in Q3, but the problems are still weighing on profits.
The industry's shift to a more sustainable future has spurred heavy investments by automakers to start selling more electric vehicles (EVs). Ford's strategy is no different. However, its progress thus far to build a financially viable EV segment hasn't been anything to write home about.
Through the first three quarters of 2024, Ford model e, where the company's EV operations are housed, posted a cumulative operating loss of $3.7 billion. This basically offset the operating income registered by Ford's legacy auto division. The leadership team just isn't seeing strong enough demand like it initially had hoped. It also doesn't help that the market is extremely competitive.
Focus on the big picture
It's a good idea to take a step back and understand that Ford possesses unfavorable qualities that lower the chances of registering adequate returns over the long term. Here are some things that prospective investors should consider.
For starters, the auto industry is very mature, with low growth prospects. The number of passenger vehicles sold globally in 2022 was just 12% higher than 10 years before. Muted unit growth doesn't provide a strong backdrop for Ford to meaningfully increase the top line. According to consensus analyst estimates, the company's revenue in 2026 will only be 0.8% higher than 2024's projected total.
Profitability is nothing to get excited about, either. Ford's quarterly operating margin has averaged just 2% in the trailing-10-year period. And its return on invested capital of 1.8% reveals an organization that is very capital-intensive without producing a sufficient payoff.
Owning companies that have an economic moat is one key factor that could boost your portfolio's chances of success. Those profitability metrics make it easy to argue that Ford doesn't have any durable competitive advantages. If it had a strong brand or had cost advantages, for example, then maybe Ford's bottom line would be much higher than it is now.
The only bright spot that I can identify for investors is Ford's capital-return policy. In the last nine months, the business paid out $4.4 billion in dividends, with the current yield being a hefty 5.27%. This can provide a steady stream of income that could be attractive to certain investors.
However, that dividend hasn't made up for the poor performance of the stock, whose price has dipped 27% in the past 10 years. I see no reason for the company to reward its shareholders even remotely close to a similar investment in the broader S&P 500. And I have zero confidence that Ford can set its investors up for life.
