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Ford and a Potential Share Buyback

Summary

The CFO of Ford made headlines with a comment concerning a potential share buyback.

The company has become more profitable and has been able to reduce its debt levels.

A share repurchase program does provide value for shareholders.

The CFO of Ford Motor Co. (NYSE:F), Bob Shanks, made some news when he mentioned that the company plans to return more value to shareholders, possibly through a share buyback. I have read a lot of discussions concerning this issue, and there are a lot of different viewpoints that I have seen. Reuters reported the CFO said that the company is largely done repairing its balance sheet, and can now look at using growing cash reserves to invest in growth or increase shareholder returns. He did not offer specific plans, but did not rule out a dividend increase or a share buyback. Concerning the increase in shareholder returns, Shanks is quoted as saying, it "would either be through an increase in the regular dividend if I thought that was sustainable through a business cycle, a supplemental dividend or potential share buybacks". This has sparked much discussion, and I would like to share a few points of information concerning the potential of a share buyback by the company.

Possibility of a Buyback

I have seen many discussions about how Ford cannot afford to make share repurchases. That the company is too heavily laden with debt, and it would put the company at financial risk. The first point concerning this is that I believe the CFO may understand the financial position of the company he works for, so I don't feel that he would make a comment like this one if it were not a possibility. We can also look at the most recent financial statement from the company to see what kind of position it is in concerning its debt and cash position. Many get confused because Ford Credit has high amounts of debt, as it is in the business of making loans to customers. The company separates its automotive cash and debt from that of Ford Credit in the financial statements, so we can see the debt and cash position without the effect of Ford Credit. Below is a snapshot from the most recent quarterly report for Ford.

(Source: Company Quarterly Filing)

As the CFO stated, the company has been able to reduce its debt to levels where it feels it can begin to return capital to shareholders. Over the first nine months of this year, Ford was able to reduce its automotive debt by $1 billion, as it fell from $13.8 billion to $12.8 billion. This is a large amount of debt that the company was able to pay off in nine months. Also noted is that the reduction was offset by the addition of the external debt of the Ford Sollers joint venture, as its debt was consolidated. So, if it were not for this one-time addition of debt from the consolidation, then the company would have lowered debt by more than the $1 billion. Ford has $1.6 billion of debt payable in one year - this is a large liability in the next year, but the company has shown that it is able to pay large amounts of debt. It also is expected to be much more profitable over the coming year than it was in the past nine months, so I would not expect this to be an issue for Ford.

The company states in the financial statements the following concerning the automotive debt, "We continue to work toward achieving our Automotive debt target of about $10 billion by 2018. We plan to reduce Automotive debt from current levels by using cash from operations to make scheduled debt repayments". That means it must pay down $2.8 billion over the next 3 years. This does not seem too much of stretch for Ford, as it has been able to pay down $1 billion over the last nine months, when the company was less profitable than it is expected to be over the next few years.

Its position also grew by $500 million over the nine months - this is while paying down $1 billion in debt. As noted in the financial statement, Ford had $22.2 billion in cash available in the automotive division. Taking away the debt from the cash, there is $9.4 billion left in net cash - an increase of $1.5 billion over the past 9 months.

Taking these facts into consideration, I believe this is why the CFO made the comments that he did. Ford is well on track to reach the debt level that it has as a goal, and has been able to increase its cash available while doing so. It is also showing continued growth in revenue and earnings, which will strengthen the financial position of the company even more. I would say that the possibility of a share buyback is logical and could be carried out by Ford.

I wanted to discuss a share repurchase program a little. I have seen many comments concerning share repurchases, and some of them seem to me to be misleading. Lots of comments state that repurchasing shares is just financial manipulation, and doesn't provide benefit to the company and its growth. The first thing I want to mention was that as an investor...


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