In my last several articles on **Ford Motor Company** (NYSE:** F**) I forecast that the venerable auto maker would restore the dividend this year. Last month, based on a forecast of an annual 40 cents per share dividend (down from 60 cents), I set a target price of $13.96 for Ford stock.

I estimate Ford will cut the dividend by at least 50% to 30 cents per share. However, the Streetâ€™s EPS estimates have increased a bit. The combination of these two developments widens my range for the stock but lowers the bottom end. I now believe it will be worth between $12 and $14 per share.

Thatâ€™s good news for investors in Ford right now, after the Jan. 6 close at $8.84. This means the stock is down almost 9% in the past month. It provides a good entry point for investors who believe the company will restore its dividend.

### Valuing Ford Stock Using Dividend Yield

Analyst data shown on *Seeking Alpha* estimates 2021 earnings per share (EPS) at $1.04 and $1.36 for 2022. The average earnings power is therefore $1.20 for the next two years. This assumes losses for 2020.

Therefore, if the company cuts its dividend to 30 cents per share, it can say that the dividend is more than four times covered by EPS. At 60 cents, EPS covered the dividend by just two times. This left no room for debt reduction and capex to spend on getting its transitioning its models to electric.

Keep in mind that the company will likely have free cash flow that is significantly higher than the dividend. This is because depreciation and amortization expenses lower GAAP earnings. Free cash flow adds these non-cash charges back but deducts actual capex charges.

Nevertheless, at a 6.0% dividend yield Ford stock would have been worth $10 using a 60-cent dividend (i.e., 60 cents divided by 0.06 equals $10).

But in the case of a 30-cent dividend, and even using a 4% dividend yield, Ford stock is worth just $7.50. This is even lower than todayâ€™s price of $8.84.

So this is a risk for the stock if Ford restores the dividend, but at a 50% hit to its prior level before it was cut altogether. Nevertheless, the market might believe this is temporary if Ford indicates the dividend will rise with higher earnings.

In that case, the market might give the stock a 2.5% yield, or a valuation of $12 (i.e., a 30-cent divided by 0.025 equals $12). This translates into a 5% yield if the dividend rises to 60 cents in a year or two (i.e., 60 cents divided by $12 equals 5.0%).

### Valuing Ford Stock Using P/E

Using the same $1.20 EPS earnings power mentioned above, we can estimate the upper range for Ford stockâ€™s value.

For example, *Morningstar* has a page showing the historical price-to-earnings (P/E) ratios for Ford. For example, from 2015 to 2019, the average P/E multiple for Ford stock was 11.65x.

There is every reason to believe that over the next several years Ford stock will still have the same multiple. That is, unless it can prove to the market that its fleet is converting quickly to electric vehicles. But so far, no one believes that.

Therefore, using its $1.20 earnings power over the next two years, and multiplying that times 11.65, the target price is $14 per share.

Now we have two ways of valuing Ford stock. Using a 50% cut to the dividend, and a 2.5% forecast dividend yield, the price will be $12 per share. And using an 11.65 historical multiple and $1.20 in average earnings over the next years, the price will be $14.

Therefore, the average target price of $13 offers most investors an upside potential of a 50% gain (i.e., $13 divided by $8.65 minus 1.0, equals 50.3%).

Even if it takes two years for that to happen, the average ROI will be 22.6% annually. That is a great return for most investors.

*On the date of publication, Mark R. Hake did not have (either directly or indirectly) any* *positions in any of the securities mentioned in this article.*

*Mark Hake runs theÂ Total Yield Value Guide*Â

*which you can reviewÂ*

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