Early in 2019, I liquidated my last position in the automobile sector by selling my Ford (NYSE: F) holdings. When investing, I buy with the intention to hold long unless my investment case is not valid anymore. This means that my decision to sell usually happens after dividends cuts or suspensions.
Below are 3 reasons why I opted to sell my positions and exclude the automobile sector in my portfolio as I focus on a dividend growth strategy.
Linear Business Models
Business models for big car manufacturers have for decades proven to remain consistent and unchanging. Their models are based around decreasing production costs, increasing production output, and selling more cars every year. Tight margins, especially for everyday car manufacturers, will become even more restrictive in the future unless this model changes.
I agree that in modern times we need mobility in order to manage our busy lives. Whether it’s the commute to work or supply/grocery run in your private life - you are probably more reliant on your wheels than you even realize depending on your location. This could be the case for the years to come, especially in rural areas; however, judging by the increasing density of major cities, I doubt that cars will be the future for short-distance mobility.
Anyone who has tried to own a car living in an area with an advanced public transit system will agree that a car is no longer the necessity it once was, not to mention the adoption of green initiatives and active lifestyle promotion that has put the attention of many towards cycling or alternative forms of transportation. Especially given that public transit system infrastructure seems to be advancing and expanding in our most densely populated areas, the future of the traditional automobile company business model is losing its leverage more and more each year.
Disruption by new competitors
Tesla (Nasdaq: TSLA) had one of the craziest runs on the stock market in 2019 / early 2020. While critics argue whether the underlying fundamentals actually support this run there is no doubt about the potential disruption of the traditional automobile industry by Tesla.
Tesla's technology has the potential to revolutionize the way we see cars, with studies suggesting that they’re up to 6 years ahead of conventional auto manufacturers like Toyota or Volkswagen. Reading these insights makes me wonder whether the futures of existing car manufacturers are safe.
Telsa is only one of the technology companies breaking into the car manufacturer market. Another one is NIO (NYSE: NIO), a huge competitor from Asia. This company focuses on electric vehicles for the global market and is fueled by contracts with the Chinese government. Though these companies seem more stable to me than the traditional automobile manufacturers, they reinvest their cashflows into their own businesses and thus can be classified as growth companies which is why I would not consider their stock suitable for my dividend growth strategized portfolio.
Recent Dividend Cuts
Ford suspended its dividend on March 19, 2020, and it was just the latest of a series of dividend cuts by car manufacturers. Before that, we saw BMW cutting its dividend in 2019 and Daimler cutting its dividend in February this year to preserve cash for the transition needed to become more competitive in the electric car segment.
The overall sentiment seems that car manufactures are decreasing their dividend in order to break into this new market, while new competitors like NIO and TSLA are already well ahead with the technology of the future but at this point in time do not pay a dividend, to begin with.
This development is the final nail in the coffin for the sector when sticking to the dividend growth investment strategy. When I buy, I plan to hold my positions for many years if not decades and eventually want to draw income from those positions once retired. Uncertainty, as posed by traditional dividend distributing companies in this sector, does not raise my confidence in a long term investment, and unless there are major changes to the industry in the years to come, I don’t plan on opening a new position.
Although the automobile industry is one still one of the biggest industries globally, employing millions of people worldwide and I foresee the demand for cars will still be there in the future, I fear for the current big players in the traditional market. Believing companies are too big to fail can be a dangerous thought as seen in my post about Boeing. I think there is a lot of change coming to this industry fueled by technological advancement and regulations to combat climate change, and it will take time for the traditional market owners to transition if they make it at all.
This uncertainty makes investing in the automobile industry an unnecessarily risky and unrewarding investment for investors following a dividend growth strategy.
I do not hold long or short positions in any of the companies mentioned in this article.
This article expresses personal opinions and observations of someone who is not licensed to provide professional financial advice. I am not receiving compensation for writing this analysis and have no business relationship with any company whose stock is mentioned in this article.