Is Ford's Dividend Premature?
Dec 9th 2011 1:47PM
Updated Dec 9th 2011 2:22PM
Ford (NYS: F) shareholders have been waiting for this one for a while: The Blue Oval's dividend is back.
Ford officials announced on Thursday that the recovering auto giant would be paying its shareholders $0.05 a share in the first quarter of 2012, its first dividend since September 2006. But despite the news, the stock closed lower as broader markets fell sharply on Thursday.
That market volatility raises a question: Given all of the economic uncertainty around the world, is the resumption of its dividend the right move for Ford now?
Premature? Or justified?
Ford managers -- and Ford's board of directors -- clearly think the time is right for a dividend. "The board believes it is important to share the benefits of our improved financial performance with our shareholders. We are pleased to reinstate a quarterly dividend, as it is an important sign of our progress in building a profitably growing company and our confidence in the future," Executive Chairman Bill Ford said in a statement.
Put another way, the folks who run Ford think of this as another milestone on the company's road back to blue chip status, and they think it's a milestone the company can now afford. CFO Lewis Booth estimated that the dividend would cost the company about $200 million a quarter and said that Ford ran "stress tests" to ensure that the dividend would be sustainable even through another significant economic downturn.
Booth and CEO Alan Mulally have consistently erred on the side of financial prudence throughout Ford's turnaround, so I think it's reasonable to take them at their word now. The level of auto sales Ford needs to break even, at least in its core market of North America, is far lower than it was even a few years ago thanks to aggressive restructuring and a move toward higher-quality products that compete well with Toyota (NYS: TM) and Honda (NYS: HMC) and command better prices. Mulally and Booth have consistently said that their goal has been to get Ford's costs and margins such that the company would continue to be profitable even through a severe recession, and recent signs suggest that the company is at least close to that goal.
And really, $0.05 is a modest dividend -- annualized, it'll give a yield of less than 2% at current share prices -- though it's likely to rise over time. But for some shareholders, it's a big, big deal.
So is this about Ford's credit rating?
One reader asked me this morning whether I thought this was a play to improve the company's credit rating, which currently stands just one notch below investment grade. I don't: I think Ford had been signaling a return of its dividend in 2012 for some time, so Thursday's news shouldn't have been a surprise to analysts. (If anything, the added costs might delay the upgrade a bit.)
I do think pressure from Ford's most important shareholder constituency -- that's the Ford family -- was probably a factor, though. Henry's descendents collectively hold nearly 71 million "Class B" shares, a special series of stock that was created just for them when Ford went public in the 1950s. Dividends on those shares collectively paid family members as much as $130 million a year back in the late 1990s, but they haven't paid a dime since Ford's dividends were suspended in 2006.
The Fords will now see a collective payout of about $3.5 million in the first quarter, money that is probably eagerly awaited in some quarters. Although Booth said, unsurprisingly, that the family's considerations weren't a factor in the decision to declare a dividend, I can't help but think that some of those family members must have been applying pressure to Bill Ford, hoping to see dividends restored as quickly as possible, but it looks to me that whatever the pressure, Mulally and Booth were able to resist it until the time was right.
More milestones to come
Ford's turnaround has come a long way since the dark days of 2006, when the company's survival was in doubt. With its global operations largely restructured, its product line almost completely overhauled, and now its dividend restored, only a few major milestones are left.
But for Ford's managers, one of the most important still lies ahead: restoration of the company's investment-grade credit status. The dividend probably won't have much effect on that process either way, as I said above -- its impact on Ford's bottom line is relatively modest, and was widely expected.
Rather, the upgrade's timing is more likely to be influenced by factors such as Ford's ability to improve margins, continue its product and sales momentum, and deal with the crisis in Europe -- factors that rival General Motors (NYS: GM) is facing as well. But even if Ford will have to wait a while longer to improve its bond-market prospects, the return of its dividend should drive increased institutional interest in its stock -- and that's likely to reward all shareholders over the next several months.
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