Should I invest in Ford and General Electric?

A photograph of Henry Ford, Thomas Alva Edison, and Harvey Samuel Firestone - the fathers of modernity. February 11, 1929. Photo c/o Herbert Hoover Library. Public Domain. Wiki Commons. Used with permission.

Dear Natalie, Should I invest in Ford and General Electric? I’m retired and would like the income. My financial advisor tells me that both companies are bargains right now. Signed, Dividend Lover.



 
Dear Income Lover,
 
Ford and General Electric are in different industries, however, the companies have more in common that you might think. Both are over a century old and have one or more problems in their business, including losing revenue or market share, cash negative operations, very high debt to equity ratios and being very behind on their pension and other post employment benefit obligations (OPEBs). They fall into the category I call Faded Blue Chips. GE lost almost $6 billion last year, and in August of 2018, the Tesla Model 3 became the top-selling car in the U.S. (by revenue). Tesla was the only American car company in the top 5.
 
Perhaps the most important thing to know about these dividend stocks is that the higher the dividend, the higher the risk. Even when the markets were roaring up up up, the issues facing General Electric and Ford Motor Company caused their stock to sink. You might remember that Warren Buffett famously sold all of his General Electric stock in 2017, just a few months before GE cut their dividend in half. The dividend slash prompted investors to dump the stock en masse. The share price lost more than half, too. So, even if you don’t know much about evaluating a company, if you are being offered a dividend of more than 3%, that’s a red flag.
  
There are a few more problems with owning individual companies in your nest egg. The first is that owning one company means you are taking on much higher risk. If you had owned GE stock in 2017, you lost half your investment, and half of your dividend income as well. If you owned a fund that had GE stock in it, alongside 100 other companies, then you’re probably still fat and happy in market returns. Another issue is that financial advisors charge you to trade individual companies (and funds, too). So, owning a lot of individual stocks will cost you a lot in fees.
 
Below are a few questions to ask yourself before you invest in any individual stock.
 
Checklist for Investing in Very Old Legacy Brands
Consider The Company’s Potential.
Consider the Industry’s Potential.
Factor in Debt, Pensions and Other Post Employment Benefits.
What’s the Dividend?
Factor in What the General Marketplace Is Likely To Do.
Are You Willing to Risk Your Principal for a Very Small Dividend?
 
And here’s a little more color on each point…
 
Consider The Company’s Potential.
You’ll need to do a Stock Report Card ® and Ask the Four Questions  ® before you can be sure that you have picked the leader in the industry*. Then it’s important to apply the rest of the 3-Ingredient Recipe for Cooking Up Profits ® to make sure that you are buying the stock at a bargain*. Never pay retail! Neither General Electric nor Ford Motor Company look very attractive when you line up the competition.

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Stock Report Card (r) by Natalie Pace. (c) 2018. All rights reserved.

Stock Report Card (r) by Natalie Pace. (c) 2018. All rights reserved.

Just as you aren’t going to buy rotten fruit just because it’s on sale, you don’t want to invest in a troubled company just because the price is low. A high dividend is designed to lure in unsuspecting investors. However, there is no reason to take the bait, even if the stock is “on sale,” if you see red flags.
 
*The strategies that I used to become a no. 1 stock picker are outlined in my first book, Put Your Money Where Your Heart Is.
 
Consider The Industry’s Potential.
The auto manufacturing industry is going to suffer under the steel tariffs. The risk is higher prices, job losses and reduced ability to compete in the global marketplace. This is all outlined in a letter that General Motors wrote to the Department of Commerce in June of this year.
 
General Electric won’t run out of customers for their energy, aerospace or renewables products in the future. However, they might have trouble making money at it. As you can see in the stock report card, GE lost almost $6 billion last year. Another thing most people are not aware of is that there are 21 nuclear power plants decommissioning – which is a risky, costly process that can take up to four decades.
 
Factor in Debt, Pensions and Other Post Employment Benefits.
In addition to having high debt to equity ratios, both General Electric and Ford Motor Company are billions behind on their pensions and OPEBs, to the tune of $34 billion and $12.8 billion, respectively.
 
What’s the Dividend?
Ford’s dividend yield is currently about 6.13%. GE’s is 3.73%. Believe it or not, in today’s world any return above 2% needs to be looked at forensically to be sure that the company isn’t distressed. Half of all investment grade companies are BBB, and vulnerable to market and industry stresses. Standard & Poor’s gives Ford Motor Co. a BBB rating, with a negative outlook. GE fares slightly better with an A rating and a negative outlook.
 
Factor in What the General Marketplace Is Likely To Do.
It’s the 10th year of the current bull market, making this the longest bull market in history. So, by the numbers, the market is very high. We should be closer to a correction point than a rally.
 
Are You Willing to Risk Your Principal for a Very Small Dividend?
There are a lot of red flags with investing in either of these companies right now. The stock markets are at an all-time high. The credit outlook for both companies is “negative” according to Standard and Poor’s. Both industries have issues and challenges, ranging from flat or negative revenue growth, negative profit margins, high debt, to underfunded pensions and other post employment benefits – issues that could be compounded by tariffs.
 
Gone are the days that you buy a Blue Chip and hold it to will it to your grandchildren. The Wall Street rollercoaster today is nothing like the days of yore. Individual companies require babysitting in today’s world of wild market swings. And in the 10th year of a bull market, every stock can be vulnerable. So, having a defensive strategy is far more important than getting more in the game. And owning a fund with a lot of companies in it protects you from the volatility of owning just one stock. 
 
We all love income. However, I wouldn’t be a dividend lover in a world where the mantra should be “The higher the dividend, the higher the risk.” Roy Rogers said it best, when he wrote, “I’m more concerned with the return of my money than the return on my money.”
 
 
If you’re not sure about any one of these things that I’ve outlined, then your next investment should be in learning how to invest! You wouldn’t bake bread without a recipe, and it’s not a good idea to try and make some dough in stocks without learning my 3-Ingredient Recipe For Cooking Up Profits. We focus on Hot Stocks (and avoiding the Faded Blue Chips) for one full day of my 3-day Investor Educational Retreats. Call 310-430-2397 or email [email protected] to learn more.
 
 
Do you have a question for me? Please email [email protected], or post it on my Twitter or Facebook pages. Our team will add your question to my Ask Natalie blog topic list for possible inclusion in this ongoing blog series.
 

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Important Disclaimers
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.  

Information has been obtained from sources believed to be reliable however NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.