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A Corporate Financial Analysis of

Ford Motor Company

 

CHAPTER 1. INTRODUCTION

The automobile industry's investment environment is a dynamic place, it experiences changing and developing all the time. In this fiercely competitive environment that is exceedingly facing pressure from foreign entities, such as Japanese automotive giant, Toyota, in order to be an attractive investment option for influential shareholders, companies – Like Ford – must seek to enhance corporate value. The purpose of the research is to evaluate Ford Motor Company as an investment option and recommend strategies for Ford to increase corporate value. This research reviews all aspects of Ford from corporate governance and stock holder structure to financial ratio analysis and dividend payout analysis. It also looks at how Ford tries to project its image and how the public and press actually view Ford. A review of “what Wall Street wants” in conjunction with an outlook on Ford's competitive future, gives the reader a clear overview of Ford's strengths and challenges for the decades ahead. This paper can be helpful to potential investors who may be considering buying stock in Ford. It can also be useful for Ford management to consider implementing suggested

recommendations. In addition, the research enhances the academic educational experience of corporate finance students – like my self – who get to apply corporate finance theory in a practical and useful way.

1.1 Outline of the study

Chapter two - Research questions

Chapter three - Research methodology, data and information collection, and methodology.

Chapter four - An introduction to Ford is provided along with a review of the corporate governance structure and implications, and how the Ford Motor Company image is perceived in the community.

Chapter five - An analysis of Ford Motor Company's stockholders.

Chapter six - This chapter will conduct financial ratio analysis of Ford

Chapter seven - This chapter will focus and analyze Ford's dividend policy.

Chapter eight - Analyst recommendations for Ford are reviewed.

Chapter nine – The chapter reviews what Wall Street wants from Ford in order to increase its attractiveness to influential institutional investment buyers.

Chapter ten – Historical stock prices are reviewed along with public sentiment.

Chapter eleven – Conclusions and recommendations are drawn to increase Ford's investment value.

CHAPTER 2. RESEARCH QUESTION

Research questions and hypotheses enable us to translate the business problem into a business research term. Through these defined questions, we can gain clarification and insight into complex situations. Moreover, asking the appropriate question allows us to cut through the ambiguity in an effort to make a formal problem analysis.

This research paper identifies two research questions to guide the case study:

1. What is the current level of attractiveness for Ford Motor Company as a viable investment option when compared against other equities (both within and outside of the automotive industry)?

2. What can Ford Motor Company do to increase its shareholder value and improve its attractiveness to influential institutional investors?

 

CHAPTER 3. RESEARCH METHODOLOGY

This chapter illustrates the research methods used in this paper and the validity for these methods.

3.1 Data and Information Collection

The key strength of the case study method is using multiple sources and techniques in the data gathering process. In the case study for Ford Motor Company, I utilized a variety of news articles, press releases and magazine articles. These materials were available from the library and Internet, which are the richest and most convenient way to obtain the latest information. Due to the fact that the press releases and company information offered on Ford's home website were written by Ford's public relations staff, we hold a critical view toward this information.

In addition to news articles, press releases and newspapers, I utilized standard and reputable financial publication sources including Annual Reports, and financial and statistical information documents provided on-line by Yahoo! Finance, Reuters, and Morningstar. These reports help the researcher to gain a deeper understanding of Ford and the automotive industry as a whole.

Although interview is a frequently used source of evidence for the case study research, it's not reasonable for me to conduct interviews due to time and financial considerations. Furthermore, due to the fact that Ford Motor Company is one of the largest automotive companies in the world, there is a large amount of information available to the public – including personal interviews quoted by numerous sources. I have utilized some of these quotes to enhance my case study.

3.2 Validity and Reliability

The research is valid and reliable because the measures used are consistent with financial analysis. Furthermore, the case study has a clear structure, providing qualitative and quantitative evidence to demonstrate the author's opinion. In this case study, many financial ratios are calculated in order to undertake a comparative analysis of the financial position and performance of Ford Motor Company against its industry, sector and broad market. Whilst it is possible to calculate large numbers of ratios, the approach adopted in this case study is to select only those ratios which are likely to be essential to the understanding of Ford Motor Company.

 

CHAPTER 4. INTRODUCTION TO FORD AND ITS CORPORATE GOVERNANCE

Ford Motor Company was founded on June 16, 1903 by Henry Ford and several of his associations. With $28,000 in cash, these inspired industrialists helped to create one of the world's largest corporations. One of Ford Motor Company's major contributions to the automotive industry was the moving assembly line. The company first went public on Feb. 24, 1956 with roughly 350,000 new stockholders. Today Ford Motor Company is a global company operating in two business sectors: automobile sector and financial services sector. The Automotive sector sells cars and trucks throughout the world and includes a

family of automotive brands consisting of: Ford, Lincoln, Mercury, Mazda, Jaguar, Land Rover, Aston Martin, and Volvo. (Ford).

At Ford, the power clearly resides with the incumbent management. Insiders (current or former executives at Ford) hold 35 positions on the board. Three insiders hold the majority (0.86%) of insider shares: William Clay Ford (with 8,078,227 shares); William Clay Ford, Jr. (6,321,843 shares); and Edsel B. Ford II (2,017,914 shares). Even though together they don't hold even 1% of all shares outstanding, they still have incredible power, because non-insider stockholders of Ford are dispersed widely. That is to say, that this dispersion makes it difficult for any one stockholder to exert pressure on the board.

The top managers of the firm have been compensated extraordinarily well in the last few years. It has been reported that Chairman and CEO Bill Ford, traditionally does not take the $1.5 million salary he is entitled to. In 2004, however, he earned roughly $22 million (due to the receipt of 103,882 shares of common stock in lieu of his salary). Ford reports that Bill Ford's compensation is tied “to the long-term performance of the company.” President and Chief Operating Officer Jim Padilla earned $966,667 in salary in 2004, plus $2 million in bonuses; and Greg Smith, executive vice president and president-The Americas, received $756,667 (plus a $1.1 million bonus). Padilla and Smith also received long-term incentive plans and bonuses for accomplishing certain targets within the recent time period. (“Bill Ford”).

It has to be noted, in management's favor, that Ford has had a good year in 2004. Worldwide net income was $3.5 billion or $1.73 per share of common and class B stock in 2004, up $3.0 billion from a profit of $495 million or $0.27 per share in 2003. Revenues reflect higher vehicle sales in major western European markets, Turkey, and Russia. Net income also reflects fewer provisions for credit losses. (Reuters).

Ford's common stock is listed on the New York Stock Exchange and Pacific Coast Exchanges in the United States and on certain stock exchanges in Belgium, France, Switzerland and the United Kingdom. Ford is followed by numerous analysts including Credit Suisse First Boston, J.P. Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Smith Barney Citigroup. The www.ford.com website reports 14 analysts who have made buy, sell or hold recommendations on the firm, providing estimates of earnings per share and future growth. While the firm provides substantial amounts of information about itself in the form of earnings reports, there is also substantial information available about the firm from external sources. Due to the large number of independent analysts following the firm's activities, there is little bias in information reporting.

As of May 1, 2005, Ford Motor Company's Corporate Governance Quotient (CGQ?) is better than 5.5% of S&P 500 companies and better than 45% of

Automobiles & Components companies. (Yahoo Finance). The Corporate Governance Quotient (CGQ?), provided by Institutional Shareholder Services (ISS) evaluates the strengths, weaknesses and risks of the corporate governance practices and board of directors of over 7,500 firms. Criteria is categorized under eight major headings as follows: 1) board of directors, 2) audit, 3) charter and bylaw provisions, 4) anti-takeover provisions,

5) executive and director compensation, 6) progressive practices, 7) ownership,

8) director education. Data for the rankings -- derived from public documents, press releases and corporate websites -- are rigorously verified by analysts before being included in the database.

Ford's Corporate Governance Quotient (CGQ?) ranking – better than only 5.5% of the S&P500 companies -- is on par with its industry (ranked better than 45% Automobiles & Components companies. (Yahoo! Finance).

4.1 FORD MOTOR COMPANY IMAGE

Ford is a family-friendly firm that wants to appeal to the widest potential audience of customers. When Bill Ford became Chairman of Ford Motor Company five years ago, he pledged that Ford would distinguish itself as a great company by their efforts “to make the world a better place.” Ford published their first Corporate Citizenship Report in 2002, in which they state their commitment to strengthen their connection with society and play an active role in bringing about

greater economic, social and environmental sustainability. Environmental issues, particularly regarding fuel guzzling SUVs, have pressured automobile companies like Ford to create environmentally friendly automobiles. As a result, Ford is focusing on hybrid technology and recently launched the 2007 Mercury Mariner Hybrid SUV and a hybrid version of a future midsize sedan. “As the hybrid market continues to grow and evolve, we will be well-positioned to drive the market and fulfill our promise to help create a better world.” (“The World's”).

In addition, Ford works toward fostering good will by donating millions of dollars each year to education, community development, and auto-related environment and safety efforts. Ford's business processes, are also “socially-oriented” in that scorecards are used to establish priorities, targets and metrics so that “safety, quality, morale (quality of relationships in the firm and in the community), and environment” are at the forefront of business decisions. (“Integrating”).

CHAPTER 5 – STOCK HOLDER ANALYSIS

Directors and Executive Offices as a group owned 1.54% of Ford Common Stock as of February 1, 2005. As of year end 2004, Ford had 497 institutional shareholders holding 772,929,294 (42.2%) of all outstanding shares. The top three institutional holders include Barclays Bank with 6.04%, State Street with 3.3% and Brandes Investment Partners with 2.7% of shares. (“Quotes & Info”, 2005). Mutual Fund companies had significant ownership of Ford stock as of

Oct. 2004. Top three mutual fund holder were Fidelity Low-Priced Stock Fund with 1.04%, Vanguard 500 Index Fund with 0.94% and College Retirement Account Equities Fund with 0.6% (see chart below). Shareholders represent 42% institutional, 56% individual shareholders, and 2% officers/management. The average stockholder in Ford is a domestic individual investor.

Table 5.1 -- Top Institutional Holders

Holder	Shares		% Out		Value*		Reported
Barclays Bank Plc	110,440,449		6.04		$1,616,848,173		31-Dec-04
State Street Corporation	59,699,622		3.26		$874,002,466		31-Dec-04
Brandes Investment Partners L.P.	48,624,464		2.66		$711,862,152		31-Dec-04
Vanguard Group, Inc. (The)	38,297,012		2.09		$560,668,255		31-Dec-04
Goldman Sachs Group Inc	28,201,925		1.54		$412,876,182		31-Dec-04
FMR Corporation (Fidelity Management & Research Corp)	22,579,995		1.23		$330,571,126		31-Dec-04
Northern Trust Corporation	19,257,660		1.05		$281,932,142		31-Dec-04
Deutsche Bank Aktiengesellschaft	16,660,288		0.91		$243,906,616		31-Dec-04
Mellon Financial Corporation	16,606,499		0.91		$243,119,145		31-Dec-04
American Century Investment Management Inc.		15,900,855		0.87		$232,788,51

Table 5.2 -- Top Mutual Fund Holders

Holder	Shares	% Out	Value*	Reported
Fidelity Low-Priced Stock Fund	19,000,000	1.04	$247,570,000	31-Oct-04
Vanguard 500 Index Fund	17,126,612	0.94	$240,628,898	30-Sep-04
College Retirement Equities Fund-Stock Account	10,734,060	0.59	$150,813,543	30-Sep-04
American Century Income & Growth Fund	9,388,301	0.51	$137,444,726	31-Dec-04
SPDR Trust Series 1	8,047,319	0.44	$113,064,831	30-Sep-04
Vanguard Institutional Index Fund-Institutional Index Fd	7,565,131	0.41	$106,290,090	30-Sep-04
Vanguard Total Stock Market Index Fund	6,531,690	0.36	$91,770,244	30-Sep-04
Investment Company of America	5,465,400	0.3	$80,013,456	31-Dec-04
Pioneer Fund	5,000,000	0.27	$70,250,000	30-Sep-04
DFA U.S. Large Cap Value Series	4,711,800	0.26	$66,813,324	30-Nov-04

 

CHAPTER 6. RATIO ANALYSIS

The following ratios for Ford – which are for the trailing 12 months ending Dec. 2004, unless stated otherwise – were obtained from Reuters. (“Reuters”). These ratios report on management efficiency (asset turnover), management effectiveness (return on equity, return on assets) growth rates (earnings per share), financial strength (LT debt to equity ratio, total debt to equity), profitability ratios (net profit margin), and stock valuations. For stock valuation, we take an in-depth look at the key ratios: Price-to-Earnings (P/E), Beta, Price to Sales, Price to Book, Price to Cash Flow, and % owned institutions.

Asset turnover for Ford (0.56) is a little bit lower than the averages for industry (0.77), sector (1.22), and S&P500 (0.95) implying that Ford is quicker than their competitors to convert their physical asset base into sales. Their lower ratio suggests a high degree of capital intensity.

Ford's return on equity for the trailing 12 months ending Dec. 2004, was 24.14 against the industry (15.66), sector (17.67) and S&P500 (19.33). This shows that the management return on the capital assets for Ford is considerably higher than their competitors. Over the 5-year period, on average Ford's return on equity (4.94) is historically less impressive than those in the industry (7.61), sector (14.05) and S&P500 (18.76). This seems to imply that Ford's most recent year

has improved management efficiency, but that the 5-year average is still trailing their competitors.

Ford's return on assets for the trailing 12 months ending Dec. 2004, was 1.29 against the industry (2.43), sector (7.61) and S&P500 (7.41). This shows that Ford's management return on the capital assets is less impressive than their competitors. This trend is noted over the 5-year period as well, where Ford's return on assets (0.41) is historically lower than those in the industry (1.34), sector (6.24) and S&P500 (6.67).

Net profit margin tells us what percent of each sales dollar has been brought to the bottom line after subtracting all costs of any kind. All else being equal, high margins are better than low margins. Ford's net profit margin over the training 12 months ending Dec. 2004 was 2.28, compared to the industry at 2.64. The Net profit margin 5-year average was 0.69 for Ford, and 1.60 for the industry. (Comparison of sector and S&P500 are less significant measures.) This implies that Ford is performing a little under that of their direct competitors.

The LT Debt to Equity Ratio looks at the company's capital base. Ford's LT Debt to Equity Ratio is 10.72. The Total Debt to Equity ratio, which takes into account both long-term and short-term debt is 10.78. If Ford's Total Debt to Equity Ratio was significantly larger relative to the LT Debt to Equity Ratio, then it would show that the company faces more risk due to the prospect of rising interest rates.

Since these two ratios are almost the same, it implies that the risk level is moderate. Earnings Per Share (EPS) growth, which is used to assess the company's ability to generate future earnings growth, was for the trailing 12 months 312.59 vs. the industry's 30.14, the sector's 22.69 and the S&P500's 23.70. The 5-year EPS growth rate is disappointing at -19.28, compared to the industry's -10.14, the sector's 6.48, and the S&P500's 13.56. The good 12 month period ending 2004 is not impressive enough to pull up the 5-year average. Continued successful management may improve future 5-year statistics. (“Ratios Ford”).

Table 6.1 – Ford Valuation Ratios

Valuation Ratios	Company	Industry	Sector	S&P 500
P/E Ratio (TTM)	6.34	10.46	17.14	20.76
P/E High - Last 5 Yrs.	NA	31.42	35.8	41.9
P/E Low - Last 5 Yrs.	NA	5.93	11.2	15.66
Beta	1.32	1.35	1.04	1
Price to Sales (TTM)	0.11	0.54	1.4	2.88
Price to Book (MRQ)	1.06	1.38	2.97	3.88
Price to Tangible Book (MRQ)	1.93	2.07	5.09	7.01
Price to Cash Flow (TTM)	1.99	7.34	12.69	15.45
Price to Free Cash Flow (TTM)	1.33	7.13	19.27	25.67
ons	42.2	42.79	53.04	65.33

% Owned Instituti

As shown in the table above, Ford's Price-to-Earnings (P/E) ratio -- the single most widely used measure of a stock's value -- was 6.34 for the trailing twelve months against the industry's 10.46, the sector's 17.14, and the S&P500's 20.76. Beta, which measures stock price volatility relative to the overall stock market was 1.32 against the industry's 1.35, the sector's 1.04, and the S&P500's 1. Ford's beta of 1.32 means that it is in line with the industry, but more volatile than

the sector and the market. It also means that Ford's stock on average will rise or fall 35% more than the market. The Price to Sales ratio is generally a useful ratio for companies that don't have earnings and don't pay dividends. This is not the case for Ford which has earnings and pays dividends -- so we exclude this ratio in our analysis.

The Price to Book ratio for Ford's most recent quarter was 1.06 against the industry's 1.38, the sector's 2.97, and the S&P500's 3.88. The ratio offers a theoretical comparison of the value of the company's stock to the value of the assets it owns free and clear of debt. The Price to Tangible Book ratio subtracts the value of intangibles such as goodwill from book value. Since Ford's goodwill element is significant to the company's value we see quite a different between last quarter's Price to Book value (1.06) and Price to Tangible Book Ratio (1.93). This significant difference between the two ratios is also noted across the industry, sector and broad market.

The Price to Cash Flow ratio is an alternative method to Net Income as a measure of a company's operating performance. Ford's Price to Cash Flow ratio was 1.99, against the industry's 7.35, the sector's 12.69, and the S&P500's 15.45. Free Cash Flow looks at the cash generated minus non-operating cash outlays; capital spending and dividend payments. Ford's Free Cash Flow ratio was 1.33, against the industry's 7.13, the sector's 19.27, and the S&P500's 25.67. Ford's relatively low Price to Cash Flow ratio and relatively low Free Cash Flow ratio

implies that Ford is less valued than the industry, and that the industry as a whole may be undervalued in comparison to the broad market.

The final line in the table above, “% Owned Institutions”, reports on the percent of shares owned by institutions. Institutional shareholders are an influential investor group. The fact that Ford has 42.2% of its shares owned by this influential group implies that the level of demand for the stock is high. This percentage is in line with the industry's 43%. Ford's institutional appeal, however, is less than the sector's institutional appeal of 53% and considerable less than the institutional appeal of the broader market at 65%.

CHAPTER 7. DIVIDEND POLICY

The Annual Statement for Cash Flow (Reuters, Yahoo Finance) below details how Ford has used both dividends and stock buybacks over the last 5 years to return cash to its owners.

Table 7.1 – Ford Cash Dividends Paid

2004	2003	2002		2001	2000
Total Cash Dividends Paid	(732.0)	(733.0)	(743.0)	(1,929.0)	(2,751.0)
Issuance(Retirement) of Stock, Net	(151.0)	9.0	287.0	(1,385.0)	(1,229.0)

In 2000, Ford issued 3 quarterly dividends of $0.50 per share, and then dropped it down to $0.30 per share in the last quarter. In 2001, the quarterly dividend

dropped again from $0.30 to $0.15 per share. In 2002, the quarterly dividend was reduced to $0.10 and remained at that amount through 2003 and 2004. (Morningstar). This is roughly 1.1% of the stock (at $9.50)

The Dividends table below details key information about Ford's cash payments to shareholders for the period ending 2004.

Table 7.2 – Ford Dividend Yields

Dividends (ending 2004)	Company	Industry	Sector	S&P 500
Dividend Yield	3.63	4.17	2.46	2.1
Dividend Yield - 5 Year Avg.	4.8	4.3	2.26	1.59
Dividend 5 Year Growth Rate	-26.62	-7.14	0.65	9.17
Payout Ratio (TTM)	20.14	44.46	25.78	29.22

High yielding stocks tend to have less attractive prospects for dividend growth. Ford's dividend yield ending 2004 was 3.63, which is a little bit under the industry average of 4.17, but higher than the sector and S&P500 averages.

Ford's Payout Ratio (20.14) -- the percent of net income that is paid to shareholders as dividends – is much lower than the industry (44.46), sector (25.78) and S&P500 (29.22). Ford's lower payout ratio is considered positive because firms that have greater income cushions reduce the chance that they might cut dividends during bad times.

When it comes to dividends, there is always a trade-off between receiving a high current dividend yield and a high rate of dividend growth. Ford pays out less of

its earnings as dividends than the typical automobile company, but has as a dividend yield on par with its industry, and far better than those in the sector and S&P500.

A look at the cash flow table below shows the total cash dividends paid by Ford from 2000 through 2004. It's a good sign that Ford's sum of net income and depreciation is greater than the sum of capital expenditures and dividends paid.

Table 7.3 – Ford Cash Dividends Paid

2004	2003	2002		2001		2000
Net Income/Starting Line	3,634.00	903.00	656.00		-5,347.00	5,456.00
Depreciation/Depletion	13,016.00	14,231.00	15,040.00		15,136.00	14,146.00
16,650.00	15,134.00	15,696.00		9,789.00		19,602.00
Capital Expenditures	-6,745.00	-7,736.00	-7,263.00		-6,952.00	-8,348.00
Total Cash Dividends Paid	-732.00	-733.00	-743.00		-1,929.00	-2,751.00
-7,477.00	-8,469.00	-8,006.00		-8,881.00		-11,099.00

This positive free cash flow allows Ford to finance its growth and dividend payments from internal sources. If Ford didn't have a positive free cash flow, it would have to sell equity, borrow money, sell assets, or use its working capital more efficiently. (“Cash Flow”).

Given Ford's recent history with low dividend payouts, stockholders are much more likely to be attracted to capital gains than dividends. Furthermore, Ford is very well recognized in the industry and has numerous analysts reporting on the firm. This means that Ford does not need to increase dividends in order to

attract more shareholders or to entice them with the possibility of excessive future cash flows.

It is also important for Ford to remain flexible in regard to their cash flow in this highly competitive automobile environment. From 1998 to 2004 Ford lost 7 percentage points of market share and at the end of 2004, its pension and benefit plans were underfunded by $45 billion. While the debt doesn't mature all at once, it still impacts long-term cash flow. (Morningstar).

Overall, however, at this point in time, Ford has strong cash flows, high cash balances, substantial bank lines and access to capital markets. They need to maintain that flexibility, however, due to possible technological changes in the automobile business, acts of terrorism, environmental issues, or other uncertainties. Paying more in dividends would jeopardize that flexibility.

Morningstar analysts believe the company will achieve average annual growth of less than 2% over the next five years and average operating margins below 2%. “Investors can collect a decent dividend yield from the stock, but it is by no means guaranteed. Although Ford doesn't face a major cash squeeze, a decline in its operations could prompt the firm to cut its payout, and a credit-rating downgrade to junk status could add to the expense of debt over time.” (Morningstar). These factors suggest that Ford should not increase their

dividend, and if they want to return cash to its stockholders, they should do it in the form of stock buybacks over dividend payments.

To evaluate how much Ford could have paid out in dividends between 2000 and 2004, we estimated the free cash flows to equity (FCFE) at Ford each year. FCFE = Net Income + Depreciation – Capital Expenses + change in Working Capital.

Table 7.4 – Ford Free Cash Flow

2004	2003		2002		2001
Net Income/Starting Line	3,634	903		656	-5,347
Depreciation/Depletion (plus)	13,016	14,231		15,040	15,136
Capital Expenses (minus)	-6,745	-7,736		-7,263	-6,952
Change Working Capital (plus)	9,228	37,477		17,792	33,335
FCFE	32,623	60,347		40,751	50,076

Ford could have returned millions more back in cash to its stockholders, either in the form of dividends or equity buybacks during this period.

A study of corporate cash flows shows that most of the nation's largest companies can increase dividend payments without jeopardizing their ability to grow. (Fink). This is because in recent years, companies [like Ford] “have improved their cash flow mostly by reducing overhead, shedding less profitable assets, and boosting operating cash flow.” Ford was ranked 4 of 86 companies, due to its high free cash flow (adjusted in millions) of 10,639. (Fink). See table 6.5 below.

Table 7.5 – Industry Dividends Adjusted Free Cash Flow Payout Ratio

Company	Free Cash Flow, Adjusted	Common Dividends Paid	Dividends Adjusted Free Cash Flow Payout Ratio	Free Cash Flow, Adjusted	Common Dividends Paid	Dividends Adjusted Free Cash Flow Payout Ratio
	(in $ millions)	(in $ millions)		(in $ millions)	(in $ millions)
General Electric	25598	7643	0.299	22751	7157	0.315
Exxon Mobil	18705	6515	34.8	12624	6217	49.2
Microsoft	14289	857	6	12976	0	0
Ford Motor	10639	733	6.9	17442	721	4.1
IBM	10611	1085	10.2	9692	1005	10.4
Verizon Communications	10586	4227	39.9	10066	4182	41.5
Pfizer	10464	4343	41.5	8447	3168	37.5
Altria	8853	5285	59.7	9538	5068	53.1
Johnson & Johnson	8523	2746	32.2	6233	2381	38.2
SBC Communications	8298	4539	54.7	8699	3557	40.9

In comparing Ford's dividend policy to its peer group, we analyze the dividend yields and payout ratios of comparable firms in 2004, as shown in the table below:

Table 7.6 - Ford vs. Industry Leaders

Price	Dividend Yield	Payout Ratio		Market Cap	P/E
Ford	9.50	3.63	20.14	17.39B	5.27
Toyota	72.67	1.27	13.45	119.25B	10.19
Honda	24.59	1.04	8.82	45.94B	10.28
Nissan Motor Co Ltd	20.02	2.16	18.71	41.00B	8.57
Volvo	41.31	4.18	55.86	16.94B	12.74
Average	33.62	2.46	23.40	48.10	9.41|

Source: (Reuters, Yahoo).

Ford's Payout Ratio (20.14) is a little lower than the average of 23.40 of these 5 automobile companies. Ford's lower than average payout ratio allows it to have an income cushion to reduce the chance that they might cut dividends during bad

times, and to maintain flexibility in the event they need to use cash in other areas. As mentioned earlier, this is their best option, due to long-term debt problems and to maintain cash flexibility during this highly competitive time in the industry.

 

CHAPTER 8. ANALYST RECOMMENDATIONS

Table 8.1 - Analyst Recommendations and Revisions (Reuters)

Consensus	Company Fiscal Year		Last
Recommendation	End Month		Updated
HOLD	December		3-May-05
1-5 Linear Scale	Current	1 Month	2 Months	1 Year
	Ago		Ago	Ago
(1)BUY	0	1	1	2
(2)OUTPERFORM	2	4	4	4
(3)HOLD	11	8	7	8
(4)UNDERPERFORM	1	1	1	1
(5)SELL	2	2	2	1
No Opinion	1	1	1	1
Mean Rating	3.19	2.94	2.93	2.69

A quick review of the Analyst Recommendations and Revisions table above provides a little insight as to how the stock is viewed by research specialists. It should be noted that even though the number of “sell” recommendations is few, that is not so much a reflection of confidence in Ford as it is typical analyst behavior to be quick to recommend purchases of stock, but almost never advise customers to sell. Underperform” and “Sell” recommendations are in fact very rare, so investors need to keep that in mind when reviewing analyst recommendations. Ford' Current Mean Rating at 3.19 is a bit higher than 1 month, 2 months and 1 year ago. The number of buy recommendations at the

current time is 0. For the last three periods 2 analysts have recommended “sell”, and 11 analysts recommend “hold.” On average, the statistics include the opinion of 17 analysts.

 

CHAPTER 9. WHAT WALL STREET WANTS FROM FORD

In appraising Ford Motor Company, it is useful to review the automotive industry as a whole to detect trends that can either be favorable or unfavorable to stock value. One issue that is critical for companies like Ford Motor Company that has 42% of its shareholders as major institutions, is to examine what motivates these institutions to buy or sell Ford stock. Ideally, automotive companies like Ford want to attract (and not repel) these influential investors.

A major study conducted in 2002 (Andrea), entitled “What Wall Street Wants from the Automotive Industry,” provides excellent information that can be used to assess the attractiveness of Ford Motor Company stock to these influential investors. The study – which was conducted for Accenture by the Center for Automotive Research -- attempts to find out just what Wall Street wants from the automotive industry and how major investors (primarily institutional) perceive automotive investments compared to all other types of equity. The client list of a JP Morgan Securities analyst was used for the population of institutional investors. Respondents worked in the US, Canada, Mexico and even a few outside North America. The make-up was as follows: approximately 66%

represented mutual funds; 17% were corporate investors; 9% were state pension funds; 6% were investment bankers; and 2% were not “institutional”. In total, these respondents contributed to overseeing over $56.2 billion in equity-only investment dollars. (Andrea).

Participants were instructed to place automotive stocks in one of three categories: “as a trading instrument; a long run investment grade, or “buy and hold” investment; or a combination of the two (trading instrument and buy and hold).” Only 14 percent chose automotive stocks for a long-term buy and hold investment. The majority, 44% said they view motor companies as purely trading instruments, something to have for a short time if they can buy it when it is undervalued and sell when it catches up to the rest of the market. This short-term ownership period is typically less than a year, so normal stock valuation techniques such as long-term company strategy, solid business fundamentals, and restructuring are not important to this type of investor. “Short horizon investors are most interested in buying automotive stocks when product pipelines are full and the product development cycle is moving from capital expenditure to revenue generation,” writes Andrea. Another problem with this short-term investment strategy is that as a short term investment, automotive companies are less favorable than high-tech firms that can move products faster and have higher profits. (Andrea).

As many as 42% say they use automotive companies as both trading and buy and hold investments – so company's like Ford are still evaluated against long-term strategies and solid business fundamentals. (Andrea).

The survey also asked participants to state the three “most important areas of historical performance” that influenced their decision to buy or sell an automotive stock. Price to earnings (P/E) and enterprise value to sales or Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) were most often mentioned. Discounted cash flow, price to sales, and price to book were also mentioned but to a much lesser degree.

In regard to the perception of risk, participants were asked whether automotive stock was “high risk/high return” or “high risk/low return” when compared against other equity stocks. The overall response was neutral – automotive stocks were not particular high or low in a risk and return perspective – except to those who reported having a shorter time horizon (and therefore had higher risk due to market timing challenges). Other trends noted was that automotive stocks were seen as more “value oriented” than “growth oriented” and that investors see automotive stocks as overall low in capital appreciation and overall high in dividend yield compared to other equity stocks. (Anders). Below is a chart that details how automotive stocks fared against other equity stocks.

Table 9.1 – Automotive Relative to Other Equity

Automotive Relative to Other Equity 00.511.522.533.54 Value Oriented vs. GrowthOriented U.S. Domestic-Exposed vs.International-ExposedHighDivident Yield vs. LowDividend Yield Low Capital Appreciationvs. High CapitalAppreciationHigh Risk/High Return vs.High Risk/Low ReturnIncome instrument vs.Capital AppreciationShort-TermBuyersLong-TermBuyersTotal Sample

In regard to risk issues, the study found that institutional investors believed that automotive stocks have more risk than other types of equity. Short-term buyers rated risk at 4.8 out of 7 points and long-term buyers rated it 4.4. In regard to future expectations participants said they wanted stronger performance from automotive firms in the future. They wanted to see an operating margin of 7.9 percent by 2010 for vehicle makers, an ROI of almost 14 percent by 2010 (rates not achieved since the mid-1990s to 2000). Furthermore they want to see product development time go down to 18 months by 2010, product cycles times go down, and general administration expenses reduced by 7% in 2010.

Finally, the study concludes by asking participants what future strategies they recommend for automotive companies to undertake. The top three responses are as follows: “close plants,” improve product development productivity and improve control over cost structure. The fourth ranked response (that trailed behind the top three) was to reduce capital expenditures. The study offers useful information for automotive companies like Ford Motor Company to understand what is expected of them in order to be an attractive buy option to influential investors. The next step after reviewing this study is for Ford to strategize and implement the necessary changes required to be competitive and attractive going forward. The next section details some of Ford's challenges and possible solutions that can increase corporate value.

CHAPTER 10. HISTORICAL PRICES & PUBLIC SENTIMENT

Even though Ford is the second largest manufacturer of automobiles in the world next to General Motors and is placed fourth among the Fortune 500 companies, its reputation has been suffering in recent years. A series of negative events that include declining sales, multiple lawsuits, recalls on parts, and the inability of Ford (and US automobile industry in general) to keep us with the clever Japanese automakers, has reduced public and press perception regarding the company. (Jumpstart). Environmental issues have especially negatively impacted Ford. “The average fuel economy of Ford's fleet is “last among the top six automakers for the fifth straight year, according to the Environmental Protection Agency,” reports the Detroit News in 2004. (Jumpstart). A Harper's Magazine writer took the Ford Excursion, the largest of all SUVs for a test drive, and discovered that the massive Excursion was only getting 3.7 miles per gallon. Estimates show that the Excursion will produce roughly 134 tons of carbon dioxide during its lifetime. (SUVs). Ford Motor Credit Co. isn't doing so well either. A Reuters article states that “the finance arm of Ford Motor Co., has no plans to change operations despite a recent warning its ratings may be cut to junk status,” CFO Dave Cosper. (Ford Credit).

Environmental groups that are concerned with global warming, extinction of plant and animal life, and emissions-related issues have targeted and wedge their campaign on Ford. Campaigners who log onto www.jumpstartford.com can learn about over 300 protest events being scheduled at 150 Ford dealerships across the

nation to fight for lower emissions. “Everyone from college students to nuns to Ford dealers tell Ford that we want zero emissions now.” (Jumpstart). This kind of negative publicity and sentiment has a huge impact on Ford's value – and is a real call for Ford to respond to public sentiment with more environmentally safe vehicles.

A historical review of stock price from January 2002 through May 4, 2005 shows how the negative perception has impacted the stock price. Average stock closing price for the period was 12.68, the minimum closing price was 7.52 and the maximum closing price 17.65. Lowest and highest intraday price for the period was 6.58 and 18.23 respectively. Review of the chart below (Yahoo! Finance), shows the volatility of the stock. Since January 1, 2005 through May 2, 2005, the stock has dropped $3.70, from $13.17 down to $9.47.

Prices have declined in response to recent negative U.S. automotive reports like the one printed May 4, 2005 by Reuters that state that both General Motors Corp. and

Ford Motor Co. have reported lower April U.S. sales. This is a result of high gasoline prices, diminishing demand for gasoline guzzling and environmentally unfriendly SUVs, and their inability to keep pace with Japanese competitors. (Brown). Ford and GM's stock prices are dropping as they lose market share to foreign competitors, like Toyota Motor Corp. which experienced an all time high, with their April U.S. sales rising 21 percent from last year.

"'Detroit (is) suffering while the industry is doing well," said analyst David Healy of Burnham Securities. "That's the bottom line before these numbers came out and it's the bottom line after they came out.'" (Brown). In 1980, GM and Ford had over 64% of the U.S. market share, which is today down to 42.6 percent (GM's at 25.1 percent and Ford at 17.5 percent). (Brown). Toyota gained 2.3 points to end the month with a 14 percent U.S. market share. “Toyota's strong overall results were driven by sales of its all-new Avalon full-size sedan, which were up 166 percent over last year, and by the gas-electric Prius hybrid, which saw sales gain 196 percent.” (Brown).

In Ford's most recent Annual Report they admit other challenges they face in the current market environment, such as excess capacity, pricing pressure by foreign manufacturers, high healthcare costs to their employees (over $3 billion), increase in price of steel and other commodities, and U.S. dollar depreciation affecting currency exchange rates. (Annual Report).

CHAPTER 11. CONCLUSION: HOW TO INCREASE VALUE

The current level of attractiveness of Ford Motor Company as a viable investment option when compared against other equities (both within and outside of the automotive industry) is low. Financial ratio analysis showed that Ford's net profit margin shows that Ford is performing under their direct competitors in the most recent year and over the past five years. Ford's stock beta of 1.32 is more volatile than the sector and the market as a whole. Ford's institutional appeal (42%) is less than the sector's institutional appeal of 53% and considerable less than the institutional appeal of the broader market at 65%. In regard to dividends, Ford's Payout Ratio is much lower than the industry, sector and S&P500. Coupled with a suffering reputation, declining stock price, and recent reports that Ford will probably lose more of its 17.5% US market share to Toyota – are all hurting Toyota's appeal as a viable investment. This low institutional investor appeal is supported by the evidence provided by the Andrea study on “what Wall Street wants” from the automotive industry.

Ford Motor Company's challenge is to increase return for its shareholders. In analyzing the above-mentioned study on “What Wall Street Wants from the Automotive Industry,” as well as reviewing industry reports and press coverage, it is clear that Ford must make some serious changes in its strategy. In order for Ford to achieve excess returns for its shareholders, it is recommended that they engage in the following activities:

1. Improve quality and the public's perception of that quality improvement.

Despite the fact that Ford has significantly improved it ratings in the J.D. Power's Initial Quality Survey and their internal “things gone wrong” measure – and safety recalls and total recalls on a volume basis declined by more than 50 percent – the public is not impressed. To improve customer perception Ford needs to continue their focus on quality but also be much more aggressive in communicating these gains to customers.

2. Lower costs.

By expanding their common vehicle architectures and shared technologies to encompass the whole line-up of automobiles – and not just the four vehicles that are currently in this category, Ford could reduce engineering and materials costs drastically. Flexible manufacturing – in which a plant is able to accommodate the manufacturing of a variety of makes and models -- should be expanded drastically. Under this type of arrangement, a flexible plant can accommodate several models, so that workers and equipment can be flexible enough to shift production in response to changes in demand. This will reduce costs and reduce production time. Ford should keep with its goal that by 2010, 75 percent of all North American and all European plants are “flexible”.

3. Deliver exciting new products.

Ford needs to get far away from SUVs and focus on exciting new products that will take customers away from the Japanese competition. Automobiles like the Ford Mondeo – which was named Britain's Best Fleet Car in the 2003 Fleet

World Honors and The Ford Transit Connect, which won the awards for Commercial Fleet Best Small Van and Best New Van – are the types of vehicles that excite the public. Other successes that are in line with consumer's needs, are the Focus C-MAX, Streetka and Sportka in Europe; the Jaguar XJ and Volvo S40 worldwide; and the Ford F-150, in North America.

4. Focus on emerging markets.

Over the next 10 years 80% of the growth in automotive sales volume will be in emerging markets, with Asian-Pacific countries with the highest demand. Ford needs to break into this market early to begin to build name brand recognition and get market share. Ford should also increase the revenue generating trend shown in 2004 due to higher vehicle sales in major western European markets, and Turkey, and Russia.

5. Develop new products faster.

Ford should continue to build their model for developing and building products faster. They should use common vehicle architectures and shared technologies for more models and makes so that they can bring products to market more efficiently. While this is currently being implemented for four distinct vehicles – the Volvo S40 (small sedan), Volvo V50 (small wagon), Focus C-MAX (multipurpose vehicle) and Mazda3/Axela (sedan and hatchback) – this strategy should be enlarged to encompass the majority of Ford's vehicle line-up.

6. Optimize technologies to be at the forefront.

Ford may have created the World's First Hybrid SUV, but only after years of laughing at the Japanese automakers for thinking of it. In order for Ford and

other U.S. car makers to be successful, they are going to have to stop playing catch up with the Japanese, and leap frog to the next big idea – like creating a Jetsons'-like car that can fly.

In closing, Ford Motor Company is currently experiencing a difficult period facing competition from the Japanese automakers, but Ford has also survived difficult periods before. In the 1970s, the F-O-R-D acronym stood for “Fix-or-Repair-Daily” in the eyes of a large number of disgruntled customers. The company turned itself around dramatically in the 1980s to be an extremely successful and important player in the automobile industry, generating high returns for its shareholders. If Ford focuses on the recommended areas above, they will without doubt be a worldwide leader by 2010 – but only if they stop following the parade and instead jump to the front and lead it.

References:

Note: not disclosed