Cancer is deadly for many different reasons. For one, it often lies undetected, while causing bodily harm for a lengthy amount of time. Ford Motor Company (NYSE:F) has a similar problem, one that doesn’t fully show up on the balance sheet or financials and often goes unknown among investors: an underfunded pension.
It’s important that investors are aware of this issue, and since the underfunded pension can be a little complicated, I’ll explain it step by step, tell you how it could be turned into a positive, and what Ford’s plan to tackle the problem is.
Grasping the size
To give you a sense of how large the underfunded pension issue is, since it doesn’t fully show up as a number on the financial sheets, I’ll compare it to automotive debt, as both are obligations due from the company.
Ford Motor Company (NYSE:F)’s roughly $86 billion in total debt is misleading, because that includes the financial division, where it takes on huge loans at low interest rates and dishes the money out to consumers for financing. The profit in this sector nearly offsets Ford’s losses in Europe. So if you take out the financial division, which adds approximately $72 billion of debt to the books, you find that Ford’s real automotive debt sits at about $14 billion. Remember that number.
In contrast, it’s estimated that Ford’s pension is underfunded by about $18.7 billion. That’s more than its automotive debt, and it’s only about $6 billion shy of the massive $23.4 billion private loan it took out (and eventually paid back) before the recession hit. Ford put up its legendary Blue Oval as collateral on that loan. It’s a big number.
Now, don’t panic, Let’s look at why this pension number is so large, how it will change going forward, and what Ford is doing about it.