Test Driving Ford's Dividend

Test Driving Ford's Dividend

The surprising turnaround at Ford Motor Co. continues with the company set to issue its first dividend in five years. Now the million dollar question becomes can that progress - and dividend growth - continue in the years ahead?

After a long and difficult journey, Ford Motor Company appears to be on the road to recovery. It was only five years ago that the future of America’s iconic auto maker was very much in doubt. Soon, however, Ford will be issuing its first dividend since it suspended the practice in 2006—when the company needed to conserve cash in the face of steadily declining sales and potential bankruptcy.

Though modest at first, Ford’s five-cents-a-share dividend, set to take effect in March, 2012, is a major step in the restoration of Ford stock to investment-grade level. Although lower than some industry analysts had hoped, Ford stands by the nickel dividend amount as a way to guarantee that the dividend is sustainable over time, even when the economy and auto sales hit those inevitable potholes.

Ford made the announcement on December 8, in the wake of its most recent earnings report. During the three month period that ended in September, the company posted $1.65 billion in profits, running its streak of profitability to 10 consecutive quarters. The company also negotiated a new four-year deal with the UAW, which resulted in a virtual wage freeze over the course of that period. That news was greeted with enthusiasm by ratings agencies, with Moody’s bumping Ford’s rating up to Ba1, one rung below investment-grade.

The jump to investment grade is highly significant, as without that designation most mutual funds and other institutions won’t touch a company’s stock. That tends to keep the price of the stock down, and makes an investment in the company less attractive to most market participants. Once the stock does enter the investment-grade arena, and more buyers come into the issue, the amount of the dividend could see a commensurate boost.

There’s significant disagreement among analysts as to the time frame in which the major ratings agencies will elevate Ford’s rating. Some see the dividend as accelerating that time frame to as soon as six months from now. Others see Ford’s ongoing, successful execution as the key to an upgrade, with the dividend having little or no bearing as to when that happens. That makes Ford a riskier dividend play than most, and perhaps more attractive to investors with a longer time frame.

With world economies undergoing unprecedented changes right now, it’s difficult to look into a crystal ball and say definitively that the Ford dividend is a great place to put your income-generating investment dollars. But it is an encouraging sign of the ongoing recovery in America’s auto industry, when just a few short years ago the very existence of that industry was very much on the brink. And, given the company’s comeback, current management seems capable of adding more value in the years ahead to a brand which used to be synonymous with American economic power.

According to Ford, the five-cent dividend will be paid March 1 to shareholders on record as of January 31.

Reviews

  • Henry Rice

    December 12, 2011

    @not Henry Rice

    Ford really is weak internationally. GM and Volkswagon are the titans in China, the fastest and largest auto market in the world. Ford sold a pathetic 27,000 vehicles in China last month. Buick alone sold more cars in China than Ford.

    Chrysler, as a part of Fiat naturally has a much larger international footprint than Ford. That includes sales in Europe as well as the faster growing Latin American market.

    So yeah, really. Both GM and Chrysler have better international prospects than Ford.

  • not Henry Rice

    December 12, 2011

    GM and Crysler are better internationally? Really? Really? and their financial strength. credit rating.. REALLY?

  • Henry Rice

    December 11, 2011

    It's hard to get excited about a 1.81% dividend yield. I don't think Ford's prospects are good. It's primarily a US auto company at a time when US sales are going nowhere. GM and Chrysler have much more international exposure. I will give Ford credit for avoiding bankruptcy. Good financial management. I wish I had purchased Ford bonds when they were paying 11% +. Now that was a good deal!

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