A Post-Election Trade That's Built Tough
Ford offers value, a big dividend, and could benefit from the upcoming change on administrations. Here's how to play it.
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In my Friday column Friday, I noted that some so-called "Trump Trades" that have soared this past week now look substantially overbought. Specifically, I mentioned prison operator stocks such as The GEO Group GEO, which has rallied more than 75% since election eve.
Today, we are going to look at a well-known American manufacturing icon that offers decent value, a big dividend yield and could also benefit from the change of administrations. I am talking about Ford Motor Co. F.
Ford is facing several challenges at the moment, including tepid demand for vehicles in some niches and relatively high interest rates, leading to higher monthly payments for its potential customers. However, one of the automaker’s biggest headwinds is related to the huge push toward electric vehicles from the outgoing Biden administration. These should be alleviated somewhat under Trump’s second administration as EV mandates was one of the areas of focus of his campaign in swing states like Michigan that are major auto manufacturing centers.
To put in perspective the negative impact Ford is experiencing due to its struggling EV operations, an investor can just look at the company’s third-quarter results that came out in late October. Ford reported non-GAAP earnings of $0.49 per share, $0.10 above Wall Street expectations. However, that good news was completely overshadowed by the dismal performance of the company’s Model e division, which is comprised of sales of EVs as well as their related parts and services.
Th Mode e business segment saw revenues decline about 33% on a year-over-year basis to just $1.2 billion after previously announcing a $1 billion EV-related charge that reflected the scrapping of its previously planned three-row SUV. Unit volume and average pricing fell, and Ford faces increasing competition from Chinese EV makers. Dealer inventory rose to 68 days, missing the company’s previous guidance of 50 to 60 days.
For 2024, Ford is expecting a negative adjusted EBIT of $5 billion from its Model e business. The company has also other challenges, but EV operations are the main albatross around Ford’s neck at the moment. Hopefully the Trump administration brings some relief in whatever form on this front.
Even with its moribund EV segment, Ford expects around $8 billion in free cash flow at the midpoint of its updated guidance for 2024. The balance sheet seems in solid shape and the $0.15 a share quarterly dividend secure. The company also pays a special dividend in February. Last year it was $0.18 a share and in 2022 it was $0.65.
Ford stock is not expensive, trading at a P/E multiple under 6x trailing earnings, even noting this is a very cyclical industry. I can enhance the yield and provide myself with downside protection with the option strategy highlighted below. I will not assume a special dividend this year even though it is likely.
Option Strategy
Here is how one can initiate a position in F utilizing a covered call strategy. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Selecting the March $11 call strikes, fashion a covered call order with a net debit in the $10.05 to $10.10 a share range (net stock price - option premium). Liquidity is very solid with the options against this equity.
This strategy provides downside protection of around 10% over the trade’s duration, which includes two quarterly dividend payouts of $0.15 cents a share.
This strategy also provides approximately 11% return potential, including dividends, even if the stock trades flat over its approximate four-month option duration. If a special dividend is paid out, both the downside protection and potential return will be higher.
At the time of publication, Jensen was long F.
