A week ago, my answer would have been "don't be ridiculous; of course not." After all, Ford, for all its remarkable progress (and profits), is still something of a turnaround in process. The company is still paying down the massive debt it took on in 2006, is preparing to confront a potential pension liability -- and is still facing a level of sales in its home market that is far below pre-economic-crisis norms. And even after getting a boost last week, its credit rating remains in "junk bond" territory.
But in one of those seemingly-offhand-remarks-that-really-wasn't, Ford CFO Lewis Booth last week suggested that a dividend could happen soon. With Ford set to report earnings later this week, are shareholders in for a happy surprise?
A surprising, but not really dramatic, change
For the last couple of years, Ford executives from CEO Alan Mulally on down have drawn a clear line in the sand: Don't expect a dividend until after the credit-rating agencies return Ford to investment-grade status, period.
Shareholders might not have loved hearing that, but it was clearly the right thing to be saying. Mulally's efforts to foster a culture of relentless focus on business fundamentals have always included a disciplined, conservative approach to finances -- and given Ford's tower of debt and shaky prospects during the dark days of 2007 and 2008, that was the only approach that was appropriate.
So has that approach changed? My sense is that it hasn't, really. That tower of debt is much reduced -- while it peaked at over $30 billion, it was down to around $14 billion as of June 30, and has probably fallen further since -- and Ford's demonstrated ability to post healthy profits despite a slow U.S. auto market has greatly improved its outlook. While the company's credit rating remains below investment grade, it's now just one small step below: Standard & Poor's raised Ford two levels to BB+ on Friday, its highest sub-investment-grade rating, following the ratification of Ford's new U.S. labor agreement.
Long story short, Ford's awfully close to investment grade now, and if Booth and Mulally think the fundamentals justify a dividend, then they might choose not to wait for the ratings agencies to agree. But expecting to happen this week might be a bit premature.
What a Ford dividend will look like
A few analysts have taken a stab at predicting Ford's quarterly dividend. Most think it will start in 2012, and the estimates I've seen range from $0.05 to $0.08 a share per quarter. That's not a huge dividend, as dividends go -- Ford stock closed at $12.51 Monday, and against that, even a $0.32 annual dividend would give a yield of around 2.6%.
That's not particularly generous as dividends go, but for shareholders who have been waiting (mostly) patiently for payments to resume, it would be a welcome start. And chances seem good that a dividend would boost Ford's share price considerably -- as a statement of financial health from a management that has built a reputation for being careful about such things, a dividend would be a powerful draw for investors.
With rival General Motors
It would also be another indicator of the country's continued recovery from the economic crisis. While hard-hit banks like Bank of America
Why it might not happen quite yet
But before we go too far down this line of thinking, there's one big caveat: If the company's success continues, I think it's very likely that Ford will start paying a dividend -- but maybe not until sometime next year.
Here's why: The auto business is seasonal, and automaker profits tend, generally speaking, to be stronger in the first and second quarters and weaker later in the year. I'm just thinking that Ford's management might take the prudent route of waiting until they had a particularly strong quarter to report before declaring a dividend, and history suggests that the first quarter of 2012 might be a better choice than the present. (Waiting would also, of course, give a bit more time for the credit rating to get bumped up to investment grade.) And really, it just seems a little premature.
But Booth's optimism during last week's call could also be seen as a hint that the company will be reporting strong results this week, and that might come with happy news about a dividend. I still think they'll wait until next year, but as a Ford shareholder, I would be quite happy to be wrong.
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