Ford needs to close the gap with GM. We think Ford can do this by following GM's lead with buybacks – as well as improving its mix of electric and hybrid vehicles as well as reining in warranty expenses. Shares of club name Ford are up about 7% year to date, largely lagging GM's roughly 22% advance over the same period. The discrepancy in performance – while frustrating – can be attributed to a variety of factors, including different approaches to returning cash to shareholders. General Motors is buying back a ton of stock. Ford, so far, not so much. “There's no reason for GM to advance and Ford to decline other than some short-term negatives,” Jim Cramer said during the CNBC Investment Club's monthly meeting in March. “The stock is mispriced…and it should go up. I sure hope they do a big buyback like GM. That would be amazing.” F GM YTD Mountain Ford vs. General Motors Year-to-date, GM shares have risen nearly 50% since the Nov. 29 announcement of an accelerated $10 billion buyback program. Ford shares are up just 26% over the same period, which is respectable in itself, but significantly lags behind General Motors. Before the buyback was unveiled late this year, Ford was down 10%, less than GM's 14% decline. While last year was great for the overall stock market, auto stocks fell due to United Auto Workers strikes that led to concessions to the union. Returns of Capital Ford doesn't compromise on returns of capital, with an annual dividend yield of 4.6% and a commitment to returning 40% to 50% of free cash flow to shareholders. To raise the dividend rate for 2023 to 50%, the company chose in February to announce its second supplementary dividend in as many years. But, as we wrote at the time and I echoed Jim's recent comments, we would prefer that Ford deploy the excess cash in buybacks. In 2023, Ford spent $5.33 billion on dividends and stock buybacks, with just 6.3% of that total on buybacks. GM was almost the opposite. It spent $11.7 billion on dividends and stock buybacks last year, with just over 5% of that total on dividends. “The idea of returning capital to shareholders is an important emerging theme in the sector since GM announced a $10 billion buyback,” Adrian Yanushek, an auto industry analyst at Redburn Atlantic, said in an interview with CNBC. The move “put some pressure on some car manufacturers.” [original equipment manufacturer] Management teams must have a thoughtful way to return cash to shareholders. EV margin is expected to reach 8% by 2026. The company recently withdrew that target. Both companies are losing money on their electric vehicle efforts. However, all of this could change, as demand for electric vehicles declines and automakers rush to lower sticker prices. Ford said last week it was delaying production of a new all-electric large SUV and pickup truck and shifting to offering hybrid options across its entire North American lineup by 2030. Ford's pivot toward hybrids had been communicated ahead of the announcement, which added details about the strategy. Jim called the switch to hybrids a smart move given how strong recent sales have been for those vehicles that run partly on electricity and partly on gas. Following Ford's April 4 announcement, Morgan Stanley auto analyst Adam Jonas raised his April 4 price target. The stock reached $17 per share from $16 and maintained an Overweight rating equivalent to Buy. Jonas believes the slowing adoption of electric vehicles is positive for Ford's free cash flow outlook and capital return profile. In a note this week reiterating his assessment of GM's overweight, Jonas offered a word of caution. “GM has effectively abandoned hybrids in its pursuit of battery-only electric vehicles,” he said [battery electric vehicle] But we may have to invest more in hybrids from here.” Jonas said he favors Ford over GM. In the third quarter, Ford posted a $1.2 billion increase in costs associated with warranties — an unexpected headwind that caused the quarterly loss. In Guidance Along with the fourth-quarter numbers, Ford said it expects warranty costs for all of 2024 to be flat year over year.During a Bank of America auto conference last month, Ford CFO John Lawler said there were “a few units in inventory.” They are being built to ensure the level of quality and standards at the end of the first quarter, which the company will report on April 24. “It's a very short-term point but this is a sector where the very short-term is important,” said Redburn's Yanushek. 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General Motors' global headquarters office is shown at the Renaissance Center in Detroit.
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