Business


Ford’s aggressive debt reduction positions it for solid future growth

Ford’s (NYSE: F) third-quarter results contained lots of good news, such as a 70 percent year-over-year increase in profits. The most important detail, though, might have been this: The company expects its cash on hand to be “about equal” to its debt by the end of the year. This year!

For a company widely thought to have barely avoided bankruptcy by taking on a crushing debt load just a few years ago, that’s remarkable. While General Motors and Chrysler were able to shed debt through bankruptcies, and competitors such as Toyota glide along with investment-grade credit ratings, some say that Ford’s debt – which exceeded $30 billion at its peak – has held the company back.

There’s some truth in that. Ford has brought forth an impressive product renaissance, but it would have been more impressive had the company had another $10 billion or so to spend. Instead, it has (to its credit) spent $10.8 billion on reducing that debt load since the end of 2009, thereby saving itself about $800 million a year in interest payments alone.

One of the company’s chief goals is to return to an investment-grade credit rating, which will reduce Ford’s future borrowing costs significantly. For the world’s most profitable automaker, suddenly all sorts of things seem possible.

Ask the Fool

Q: What does a “2 percent floor” mean, in tax talk? – L.C., Mobile, Ala.

A: It refers to your miscellaneous itemized deductions. They need to exceed 2 percent of your adjusted gross income (AGI) in order to be of any value. If they do exceed it, you’ll be able to deduct only the amount by which they exceed it.

For example, if your AGI is $50,000, your floor will be 2 percent of that, or $1,000. If your miscellaneous itemized deductions total $675, you can’t do anything with them. But if they total $1,500, you can deduct $500. Lots of expenses may qualify, such as certain home office expenses, tax-preparation fees, investment-related fees, job-hunting expenses and job-related expenses.

Learn much more about taxes in our Tax Center at www.fool.com/taxes, and from the horse’s mouth, at www.irs.gov. And ask your tax questions on our Tax Strategies discussion board at http://boards.fool.com/ tax-strategies-100155.aspx.

Q: What’s a zero coupon bond? – D.C., Santa Maria, Calif.

A: It’s a special kind of bond. Bonds are essentially loans, where you’re typically lending money to companies or governments. With a traditional $10,000 bond that has a 5 percent interest rate, you lend $10,000 to the borrower and receive interest payments of 5 percent per year. (In the past, people had to send in coupons in order to receive these payments.) When the bond matures, you get your $10,000, the principal, back.

With a zero coupon bond, there are no interest payments, but the amount you lend is less than the amount you’ll receive at maturity. Thus, a zero coupon bond could pay you the equivalent of 5 percent per year by having you lend $6,139 today in order to receive $10,000 in 10 years.

My Dumbest Investment

Years ago, I was working on a campaign for an appliance company, just prior to its initial public offering (IPO). One of the ad agency guys suggested it as a “hot tip,” as it was starting a TV campaign, had a great product mix, new stores, etc. I bought 100 shares at $13 and watched with glee as it approached $30. I figured it would go up forever. It slid back to around $20. I thought it would return to $30, but just in case, I placed a sell order at $25. The stock made it to $24.75, but not $25, so the shares weren’t sold. Then they began a long slide.

I bailed around $5, and it later filed for bankruptcy protection. Of course, that was long before I found The Motley Fool, and I didn’t bother to do one second of real analysis of the company or any research of any kind. – E.C., Venice, Calif.

The Fool responds: Research really matters. A stock’s price may be volatile, but it’s ultimately tied to the company’s health, growth and profits.


 

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