In life there is good debt, and bad debt. Student loans are considered good debt because, in theory, your future return of a higher salary will pay off more than your original investment. It’s no different for the bulk of Ford’s debt, they receive all those billions of dollars and then loan them out through its financial division at a higher interest rate, making a fair profit. The revenue brought in the the financial division was over $7 billion for 2012, and at a pre-tax profit of $1.7 billion. That’s a sizable chunk of profit, thereby making the vast majority of Ford’s debt “good” debt. Automotive debt, which is more of a “bad” debt, only accounts for roughly $13 billion. Overall, the Ford debt picture isn’t as bad as misconceptions portray it. That fact, combined with Ford’s management diligently paying down its debt, should leave investors little to worry about regarding automotive debt. However, there is an often overlooked issue that remains of concern — underfunded pension.
Future
The future debt problem doesn’t reside as much with automotive debt, as it does with its underfunded pension. Ford has tackled the problem over the past couple years, including a buyout offer for its pensioners and paying $3.4 billion into the fund in 2012. Even so, Ford said its pensions are still underfunded by $18.7 billion, much larger than its automotive debt. This doesn’t show up on balance sheets, and is often forgotten, but it could be a huge issue in the future. In 2013, Ford pledges to pay $5 billion into its pension fund with cash that could be used for dividend payments or further payments on automotive debt. If the underfunded amount continues to grow much larger than automotive debt, it should concern investors.
Bottom line
One event that makes me feel that the debt picture isn’t an issue, is the recently doubled dividend. I trust that if Ford’s management, who has made good decisions since Mulally’s arrival, doubled the dividend, the underfunded pension is under control. Management’s confidence may stem from the record-low discount rates, making it less of an issue as long as the economy and markets continue to grow. One thing is clear: Some misconceptions of Ford’s debt aren’t realistic. With a company turnaround completed, the economy gaining momentum, and an improving balance sheet, the future is still bright for Ford.
The article Do You Understand Ford’s Debt? Because You’d Better originally appeared on Fool.com and is written by Daniel Miller.
Fool contributor Daniel Miller owns shares of Ford. Follow Daniel on Twitter. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford.
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