3 Reasons to Buy Ford Stock Now

Few things in life are worse than watching your closest rival thrive while you struggle. That's exactly what happened to Ford Motor Company (NYSE: F) during its second-quarter earnings report as its spike in warranty costs and electric vehicle (EV) losses drove its earnings 35% lower to $0.47 per share, well below Wall Street estimates. Meanwhile, crosstown rival General Motors topped estimates and even increased its full-year outlook for earnings.

In fact, after Ford posted its results, the stock promptly sold off for its worst trading day since 2008. All that said, the quarter wasn't a total disaster for Ford investors, and here are three things long-term shareholders should keep in mind.

Quality improvements

Ford's reputation for vehicle quality has taken a substantial beating in recent years. In fact, Ford led the U.S. automotive industry for three consecutive years and leads again through the first quarter of 2024. While recalls are certainly a part of the business in the industry, Ford's substantial recalls are taking a toll on the company's bottom line.

During the second quarter Ford's warranty costs spiked $800 million higher compared to the previous quarter, drastically hurting profits. The good news is that the majority of the problems are on older models from around 2016 through 2021.

Ford CEO Jim Farley has made improving quality a focal point since he took control, and recently J.D. Power reported that Ford jumped 14 spots to rank ninth in the company's 2024 U.S. Initial Quality Study. There will be roughly a 12 to 18 month lag before we see newer quality improvements offset warranty costs, but management believes the second half of 2024 results will check in at expectations, rather than continue its recent surge higher.

The dividend difference

Dividends, especially when reinvested, can make a world of difference when it comes to portfolio returns. For a perfect example, look no further than Ford -- it posts total returns, which include dividends, that dwarf its stock price gains.

F data by YCharts

Ford's $0.15 per share quarterly dividend is good enough by itself as a yield of 5.5%, but there's more to the story. Ford has committed to returning 40% to 50% of free cash flow to investors primarily through dividends, rather than a combination including share buybacks.

That level of commitment often leaves room for Ford to dish out supplemental or special dividends annually, including an extra one-time $0.18 per share dividend announced for the fourth quarter of 2023, and a significant $0.65 per share special dividend announced for the fourth quarter of 2022.

Ford Pro powers profits

When it comes to Ford's results, the importance of its Ford Pro division has become blatantly clear. Ford Pro is its commercial business division that delivers vans, Super Duty trucks, and subscription services for fleets, among other things.

For the first half of 2024 Ford Pro generated a 21% increase in revenue, $5.6 billion in EBIT, and at a 16% EBIT margin. Compare that to the company's Ford Blue, its legacy combustion engine vehicle business, which posted a first-half 3% decline in revenue, only $2 billion in EBIT, and at a meager 4.3% EBIT margin.

Further, Ford's subscriptions to Ford Pro software were up 35% during the second quarter, and mobile repair orders fulfilled more than doubled -- it's a valuable and high-margin business for Ford Pro. Ford also adjusted its strategy for its Ontario, Canada, Oakville plant to produce up to an extra 100,000 Super Duty trucks rather than two new electric vehicles as originally planned. As Ford remains supply constrained for many Ford Pro products, this will help boost results in the near term.

What it all means

Ford definitely faces near-term challenges in improving quality, lowering warranty costs, reducing EV losses, and convincing investors it's moving in the right direction. But Ford also has immense upside if it can get its EV operations to break even over the next few years , continue dishing out its dividend, and grow subscription services and sales with Ford Pro. Those are three long-term reasons to believe Ford is a long-term buy despite current challenges.

Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy .