If the stock market is a game, Ford Motor Co (F.N) appears to be behind, but it may be ready to start narrowing the gap with General Motors Co (GM.N).

Ford's stock has risen 5.6% this year, slightly lagging behind General Motors' 30% gain and the S&P 500's 16% gain. The difference between the two major U.S. automakers is not great. Both of them have increasing sales. The market expects Ford to generate approximately $22 billion in operating profit in 2024 and 2025, while General Motors is expected to generate $26 billion. Both have exceeded the market average in electric vehicle sales growth.

The main difference between the two is their plan for returning capital to shareholders. General Motors has announced or completed about $16 billion in share buybacks, accounting for about 30% of its total market value since first announcing a $10 billion buyback plan on November 29. Ford, on the other hand, insists on distributing dividends, paying 15 cents per quarter and a special dividend of 18 cents in March.

It is not common for one of the two largest U.S. automakers to perform poorly relative to the other. Morgan Stanley analyst Adam Jonas pointed out in a recent report that when this happens, the underperformer usually narrows the gap. It just needs a catalyst. For Ford, the catalyst is simple: reduce investment in electric cars, improve quality, and focus on shareholder returns.

"We believe that Ford has the opportunity to narrow the gap by focusing on capital discipline," Jonas wrote. He rated the stock a buy, with a target price of $17, a 32% increase from Wednesday's closing price of $12.87.

"Don't expect Ford to perform share buybacks like General Motors," said Michael Ward, a free capital market analyst. The Ford family still controls 40% of the company's voting rights, and Bill Ford Jr. is the executive chairman of the board of directors. The Ford family likes to receive dividends. Ford's current plan is to distribute 40% to 50% of its free cash flow as special dividends each year.

More special dividends are expected to come. Ford will generate $21 billion in free cash flow in the next three years. If 50% of it is paid, it will be equivalent to an additional payment of up to $2.60 per share, or 20% of the current stock price. This does not include the quarterly dividend of 15 cents. However, the stock market seems unimpressed. Ford's stock price has fallen by 16% in the past 12 months. Ward is still hopeful, saying the company is more focused on overall shareholder returns.

In the past, management bonuses were based on a combination of stock performance, capital returns, profit margins, and free cash flow targets. However, improving business performance does not always lead to stock price gains. Over the past decade, Ford's operating profit margin has improved by about four percentage points compared to the previous ten years. What are the results of all these efforts? Ford Motor Co. shares have reached their 1987 level. CFO John Lawler said at an investor conference in June that management now receives compensation based on total shareholder returns.

However, what Ford needs to do is not only pay dividends and buy back shares. Ford's profit margin lags behind that of General Motors, and Ford plans to reverse this by cutting costs by $2 billion. Part of the cost improvement will start with quality. Ford's annual warranty cost is about 3.5% of sales, higher than General Motors' 3% and Toyota Motor Corp.'s (TM.N) 1%. Increasing it to the level of competitors could mean an increase in operating profit of $1 billion to $2 billion per year, which is significant for a company expected to earn $11 billion in 2024. Ford CEO Jim Farley admitted the importance of quality for Ford in April and noted a 10% improvement in quality from 2022 to 2023, and another 10% increase in the current model year.

Finally, there is FordPro, which is everything other businesses are not. The division mainly sells and services trucks, cars, and commercial vehicles to corporations, with a first-quarter operating profit margin of 16.7%. This performance has raised questions on Wall Street about how Ford can monetize the division through spin-off or an initial public offering. This is not likely to happen. What the Ford Specialty Division can do is to help investors believe that profits will not evaporate during an economic downturn.

But the greatest improvement in free cash flow must come from Ford's electric car business. Despite the traditional automotive business and Ford Pro jointly earned a profit of 3.9 billion USD, Ford's electric car division (Modele) still lost 1.3 billion USD . Modele has not reached a scale or cost structure that generates sustained profits. Ford has not given up on electric cars, but it has to reduce these losses. This means reducing spending on electric cars. When Ford released its first quarter financial report, it lowered its capital spending guidance for 2024 from a previous range of 8 billion to 9.5 billion USD to a new range of 8 billion to 9 billion USD. This may not have caught people's attention, but it equates to slowing spending on electric cars.

Ford may also get help from a stronger car market. Americans are expected to buy 16 million new cars in 2024, slightly higher than about 15.5 million in 2023. John Murphy, a Bank of America analyst, believes that industry sales will peak at 17 million to 18 million vehicles in 2028. He believes that Ford will gain market share during this period. His target price of USD 21 reflects an increase of more than 60% in the stock price.

In summary, reducing capital spending may be the best indication that Ford is serious about its stock price.