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Should Ford Investors Brace Themselves for Dividend Cut?

Zacks Equity Research

With a dividend yield close to 7%, Ford F is one of the highest-yielding stocks among the S&P 500 companies. While the company has been consistently paying quarterly dividend of 15 cents a share since 2016, the payout growth has been moribund. Indeed, it had paid special cash dividend in the beginning of 2016, 2017 and 2018. However, the firm did not pay any special dividend this year.

Notably, Ford’s free cash flow (FCF) in the last reported quarter was not able to cover its dividend payments. A month back, Ford’s debt rating was downgraded to junk status by Moody’s on worries of weak financial outlook, as the firm embarks on its $11-billion restructuring program. Per Moody’s, the prospects of the firm’s cash flow and profit margins appear dim.

Amid the growing crisis, the question is: How safe is Ford’s dividend?

Ford’s Dividend Status

Ford is one of the companies that has always emphasized on its commitment toward dividend payout. It displays an impressive dividend yield of 6.9%, outperforming the industry’s 3.3% and S&P’s 1.9%. The dividend also compares favorably with its top peers, namely General Motors GM and Fiat Chrysler FCAU, which display yields of 4.3% and 0%, respectively.

The firm has been consistently paying steady quarterly dividends of 15 cents a share since 2016. It should be noted that Ford actually paid dividends five times from 2016 through 2018, including a special dividend in the beginning of each year. This was in addition to its stable 15 cents payout every quarter. In 2016, the company had paid a special dividend of 25 cents, resulting in an annual payout of 85 cents. Likewise in 2017 and 2018, Ford’s annual dividends amounted to 65 cents and 83 cents a share respectively, which included special dividend of 5 cents and 13 cents along with the regular 15-cent payout.

Markedly, Ford has already slashed its dividend from the last year, as it did not make any special payout in 2019. As such, the forward rate is now 60 cents a share, which is lower than the last three years.

While its special dividend has been slashed, is the regular dividend also at risk? Let’s delve deeper to analyze the overall scenario of the company.

A Closer Look at Ford’s Financials & Long-Term Plans

While Ford’s adjusted FCF is improving, it is still not supporting the dividend payouts. The company recorded second-quarter 2019 FCF of nearly $200 million, which did not cover the shareholder distributions of 600 million. On a year-to-date basis, the firm’s FCF stands at $2.1 billion, up from $1.2 billion in the year-ago period.

Year-to-date shareholder distributions for 2019 stand at $1.2 billion, lower than $1.8 billion in the corresponding period last year, as the company slashed special dividend payout this year. However, considering high capital budget and restructuring expenses, there’s little chance for the company’s FCF to make way for special dividends, going forward.

Year to date, the capital outlay of the firm has been $3.5 billion. The company expects full-year capex to be about $7.7 billion. In fact, as it is restructuring the business, annual capital spending is likely to be around $7 billion through 2022.

As we know, due to growing focus on electric and self-driving cars, which seem to be the future of the auto industry, the company is undergoing a restructuring program. Ford has already invested $1 billion in the self-driving unit Argo and is expected to inject more capital to the project, which will be co-partnered with German automaker Volkswagen VWAGY.

Hence, in addition to the normal capital spending, Ford anticipates EBIT charges of $11 billion for global redesign initiatives, with negative cash effects of $7 billion. The company expects to incur $3-$3.5 billion of EBIT charges in 2019, with negative cash effects of $1.5-$2 billion.

These cash charges will erase half of its 2019 FCF of say $4.2 billion ($2.1 billion H1 FCF *2). With the company expecting shareholder distribution to be around $2.6 billion for the year, the FCF is not likely to fund the dividend payouts.

Amid restructuring programs, insufficient FCFs can weigh on Ford, leaving no room for other pressing obligations like pension contributions and debt repayments, unless the firm decides to lower the cash balance.

Should Shareholders Buckle Up?

Investors should note that Ford had a hefty cash reserve of more than $22 billion (as of Jun 30, 2019), which is intended to sustain new product developments and dividend payments. Even if FCF do not provide enough support, the firm’s healthy cash balance can cover the regular dividends. As Ford boasts an impressive dividend yield and steady payouts, it will become more difficult for the company to cut dividend. However, we believe that Ford will be able to tide over the blues and manage to maintain its appeal among dividend investors.

Though the company’s $11-billion restructuring program — upon completion — is likely enhance profitability in the long term; the same will put pressure on Ford’s financials. The company’s mega spending plans to produce next-generation cars bode well for long-term prospects. However, investments to develop technology, and manufacture and launch these cars will raise costs, and create short-term strains on Ford’s profit margins and cash flows.

Despite the headwinds, a cut in the company’s regular dividend seems unlikely as long as the cash reserve remains strong. The supplemental dividend can certainly vary depending on FCF, but we certainly don’t expect Ford to put brakes on regular dividend and dash investors’ hopes.Considering the firm’s priority to reward its shareholders by paying regular dividends through business cycles, investors should remain rest assured. 

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