When it comes to rivalries, few can match the history and fierceness between Ford Motor Company (NYSE: F) and General Motors (NYSE: GM). You could compare it to some of the greatest rivalries in sports, such as the Yankees vs. Red Sox, the Lakers vs. Celtics, or even other business rivalries, such as Coca-Cola vs. PepsiCo.
The Appetite for Shares: A Strategic Move
General Motors wasn’t shy about its strategy to return value to shareholders through share buybacks. It’s a simple strategy where the company purchases its own shares from the market and cancels them to reduce the number of shares in circulation, thereby increasing the value of the remaining shares. For shareholders, this means higher earnings per share and a higher return on future dividends.
GM announced a large $10 billion buyback on Nov. 29, and then later announced a new $6 billion share repurchase authorization with a target of reducing its shares outstanding to less than one billion. The automaker ended the second quarter with a roughly 1.14 billion fully diluted share count, which was down 18% year over year.
Ford’s Path Ahead: Embracing Change
Ford could easily follow its crosstown rival’s lead and announce a large share buyback. After all, Ford has a strong balance sheet with roughly $27 billion in cash and roughly $45 billion in liquidity. During the second quarter, it increased its healthy free cash flow guidance to a range of $7.5 billion to $8.5 billion, and it’s long targeted returning 40% to 50% of adjusted free cash flow to shareholders.
So, what’s holding Ford back, you might ask? The Ford family still owns about 40% of the voting power in Ford company shares, and it’s well known that the family loves their dividends.
The Contention: Dividends vs. Buybacks
The Ford family will always opt for dividends over share buybacks, and Ford noted on its second-quarter conference call that the automaker believes it has better opportunities for its cash than buybacks. However, with such a strong balance sheet, it’s reasonable to think Ford could authorize a $5 billion share buyback program while still dishing out its quarterly and supplemental dividends to a healthy and valuable degree.
Ford’s near-term future looks to be bumpy as the company navigates improvements in production efficiency, addresses losses in its Model E division, and works on resolving quality issues.
The Investment Proposition
It might be unpopular with the Ford family, but with the automaker’s stock down 23% over the past decade, Ford should consider doubling down on returning value to shareholders by initiating a share repurchase program if the stock’s price-to-earnings ratio again dips below 10 times earnings.
Before you consider investing in Ford Motor Company, it’s advisable to evaluate potential opportunities and risks associated with the industry.