Ford needs to close the gap with General Motors . We think Ford can do it by following GM’s lead on buybacks — plus, refining its mix of electric vehicles and hybrids as well as reining in warranty expenses. Shares of Club name Ford have gained about 7% year to date, lagging by far the nearly 22% advance for GM over the same stretch. The divergence in performance — while frustrating — can be chalked up 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 is no reason that GM should be advancing and Ford is hanging back other than some short-term negatives,” Jim Cramer said during the CNBC Investing Club’s Monthly Meeting in March. “The stock is wrongly priced … and it should go higher. I sure wish they would do a big buyback like GM. That would be amazing.” F GM YTD mountain Ford vs. General Motors YTD Indeed, shares of GM soared about 50% since announcing on Nov. 29 an accelerated buyback program worth $10 billion. Ford only climbed nearly 26% over the same period — respectable on its own, but noticeably behind GM. Before the buyback disclosure late this year, Ford had been down 10%, which was less than GM’s 14% decline. While last year was great for the overall stock market, auto stocks were held back by United Auto Workers strikes that resulted in concessions to the union. Capital returns Ford is no slouch on capital returns, with an annual dividend yield of 4.6% and a commitment to return 40% to 50% of free cash flow to shareholders. To bring its 2023 payout ratio to 50%, the company in February opted to declare its second supplemental dividend in as many years. But, as we wrote at the time and Jim’s recent remarks reiterated, our preference would be for Ford to deploy the excess cash into buybacks. In 2023, Ford spent $5.33 billion on dividends and stock repurchases, with only 6.3% of that total on buybacks. GM was roughly the reverse. It spent $11.7 billion on dividends and stock repurchases last year, with only just over 5% of that total on dividends. “The idea of returning capital to shareholders is an important theme emerging in the sector since GM announced the $10 billion buyback,” Redburn Atlantic auto analyst Adrian Yanoshik said in an interview with CNBC. The move has “put some pressure on some automotive OEM [original equipment manufacturer] management teams to have a thoughtful way of returning cash to shareholders.” EVs vs. hybrids Another reason for GM’s recent outperformance has been management’s expectation of an electric vehicle EBIT margin of mid-single-digits by 2025. Last year, Ford had said it expected to reach an 8% EV margin by 2026. It recently pulled that target . Both companies are losing money on their EV efforts. All that could change, however, as EV demand softens and automakers rush to cut sticker prices. Against that backdrop, Ford said last week it’s delaying production of a new all-electric large SUV and pickup truck and shifting to offer hybrid options across its entire North American lineup by 2030. Ford’s pivot toward hybrids was telegraphed before the announcement, which added details around the strategy. Jim has been calling out the shift to hybrids as a smart move given how strong recent sales of those part-electric, part-gas powered vehicles have been. Following Ford’s announcement on April 4, Morgan Stanley auto analyst Adam Jonas raised his price target on the stock to $17 per share from $16 and kept his buy-equivalent overweight rating. Jonas believes slower EV adoption is a positive for Ford’s free cash flow outlook and capital return profile. In a note this week reiterating his overweight rating on GM, Jonas offered a word of warning. He said, “GM virtually gave up on hybrids in its push towards pure BEV [battery electric vehicle] architectures… but may have to spool up investment in hybrids from here.” Jonas said he prefers Ford over GM. Warranty expenses One of the headwinds for Ford has been greater warranty expenses due to recalls and troubled launches of new vehicles. During its third quarter, Ford recorded a $1.2 billion increase in costs associated with warranties — an unexpected headwind that caused the quarterly miss. In guidance alongside Q4 numbers, Ford said it expects warranty costs for full-year 2024 to be flat year over year. During Bank of America’s auto conference last month, Ford CFO John Lawler said there was “a little bit of units in inventory” building up to ensure quality level 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 does matter,” said Redburn’s Yanoshik said. (Jim Cramer’s Charitable Trust is long F. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
The General Motors world headquarters office is seen at Detroit’s Renaissance Center.
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