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A Little Good News for Ford Investors

Source The Motley Fool

Imagine a booming automotive market, a blossoming middle class, and a preference for Western products, and you have China roughly two decades ago. It's why foreign automakers raced to the market and eagerly got into joint ventures with domestic automakers. But oh, how the tables have turned.

Now foreign automakers are scrambling to compete in China amid a brutal price war. In the midst of chaos, however, Ford Motor Company (NYSE: F) managed to give investors a bit of good news about this troubled segment of its operations.

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Surprise profit in a competitive market

No investor wants to accept disappearing profits, but investors could at least understand the situation in China was dire. After years of learning the ropes of producing vehicles from Western automakers in forced joint ventures, the Chinese government poured in capital and highly subsidized its automotive industry with a focus on electric vehicle (EV) technology.

That created a long list of highly capable EV makers that are currently more advanced and more affordable than their Western automotive peers. Add that to a booming appetite for EVs -- in March, battery electric vehicles (BEVs) accounted for 51% of China's automotive sales -- and companies such as Ford have had a mighty struggle competing.

"When I left China in 2016, it was a digital society back then," John Lawler, Ford's vice chair and former chief financial officer, said at an analyst conference, according to Reuters. "It's just only advancing. They're leaders in battery technology. They're leaders in development. They have the lowest cost structure in the industry."

There's good news, however. In a rare glimpse into Ford China's business, the company said it made $900 million in earnings before interest and taxes (EBIT) in 2024. That's also a good sign for rival General Motors (NYSE: GM) and its investors, as the Detroit automaker is currently shuttering plants and taking a $5 billion restructuring charge.

Tariff uncertainty

To add to it all, we now have tariff uncertainty. After President Donald Trump and his administration slapped tariffs nearly across the board, including a 25% tariff on imported vehicles and a soon-to-be 25% on imported automotive parts, there's been a scrambling of suppliers. U.S. tariffs on most Chinese products now total 145%.

After several back-and-forth retaliation tariff announcements, Beijing imposed a 125% tariff on U.S. goods -- for any product. Ford has already stopped exporting vehicles to China, which includes the Mustang and F-150 Raptor. Add in the fact that tariffs could cause billions in added costs or even production disruptions, and you have a huge potential headache for American auto makers.

Is Ford stock a buy?

Many investors are attracted to Ford for its lucrative dividend, and that's a solid reason, to be sure. In fact, Ford's dividend currently sits at a lofty 7.9% yield as investors have fled from owning shares amid tariff uncertainty. While Ford being able to produce EBIT profits in China is actually a huge deal for investors, and removes some uncertainty from the company's earnings, it still has other challenges to fix. One of those challenges is the company's higher warranty costs due to high numbers of recalls.

Ultimately, while Ford's dividend is enticing, the company's stock price has been stuck in the mud for years, and investors would be wise to watch this company from the sidelines for now.

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Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.

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