After a complete company turnaround that will be discussed in future business classrooms across the U.S., Ford reinstated its dividend, which had been absent for more than five years. At today's level of $0.40 per share annually, that's a yield of roughly 2.8%. That's a favorable number when compared to competitors such as Toyota , at about 1%, or General Motors , which doesn't dish out any dividends. I think Ford is an intriguing value play, and potentially one of the best dividend stocks out there right now.
I don't believe it's a matter of if, but when Ford will increase its dividend. If Ford increased it by $0.20 annually, it would bump the yield to about 4%. That's a move that would attract additional demand from income investors and boost Ford's stock price. That hypothetical increase would bring Ford's payout ratio to about 40%, which might be a little higher than investors would like. This is using current net income numbers, and I expect Ford to increase its net income enough within two years to comfortably deliver a $0.20 dividend increase.
Rear view mirror
To get an idea of Ford's health the last time its dividend payment was $0.40 a share annually, we have to turn the clock back to 2005. Let's take a look at key financials that can help sum up a company's health quickly.
To put it bluntly, Ford today is doing much more with less. It's generating almost three times as much net income as it did in 2005 on about 25% less revenue. Ford is pushing for 85% of its global sales to be off nine core platforms in a few years. For that reason and others, we can expect Ford's net income margin and economies of scale to stay strong -- providing sustainable and profitable growth. In order to continue growing its net income, it must increase its top line revenue from vehicle sales. Take a look at Ford's vehicles sales in the U.S., and you can get a sense of where the company needs to be:
The outlook for U.S. sales is increasing by the day as consumers continue to feel more confident in the country's gradual economic recovery. Ford's producing better vehicles than it did in years past in terms of quality and value. I expect Ford to follow its recent trend of increased sales, and consistently grow revenue. I definitely believe Ford's profitability is healthy and sustainable -- allowing the company to boost its dividend sooner rather than later. That's only one part of the equation though; Ford needs to have the cash to do so. That's where we run into a minor speed bump in our quest for an increased dividend.
While the company is vastly healthier in terms of net income and operating efficiency, it's also dishing out huge sums of cash to expand into emerging markets. Ford is also diligently paying into its underfunded pension at higher levels than required. Both of these factors have knocked Ford's cash flow to levels that can't - or shouldn't - support an increased dividend right now.
Ford is in much better financial condition than the last time its dividend was $0.40, and is operating in a way that will allow it to boost its dividend soon. Consider that losses in Europe have bottomed out and, by mid-decade, Ford expects to break even in the region - saving almost $2 billion annually. Also, by 2015, Ford won't be spending as much to expand into China, and will undoubtedly be churning more profit there than it does today. Combine those factors with improved sales in the U.S. - its main profit generator -- and I think you can expect a dividend increase by 2015. Until then, enjoy the ride. I still believe Ford to be undervalued, even after its run-up over the last year.
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The article One of the Best Dividend Stocks Everyone Overlooks originally appeared on Fool.com.Fool contributor Daniel Miller owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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