Ford: Dividend Dynamo, or Blowup?

Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how Ford (NYSE: F  ) stacks up. In this series, we consider four critical factors investors should examine in every dividend stock. We'll then tie it all together to look at whether Ford is a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

Ford yields 1.5%, a bit lower than the S&P 500's 2.1%.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.

Ford has a modest payout ratio of 17%.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than 5 times is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Let's examine how Ford stacks up next to its peers:

Company

Debt-to-Equity Ratio

Interest Coverage

Ford Motor 1,579% 9 times
General Motors (NYSE: GM  ) 26% 9 times
Toyota (NYSE: TM  ) 110% 8 times
Honda Motor (NYSE: HMC  ) 88% 22 times

Source: S&P Capital IQ.

Toyota, Honda, and especially Ford, carry quite a bit of debt relative to their equity, whereas GM's bankruptcy extinguished most of its debt. Still, at current levels of operating income, none of these car makers is having trouble making their interest payments. Given its levels of free cash flow, Ford's apparently high debt-to-equity ratio is much less of a concern than it may appear.

4. Growth
A large dividend is nice; a large, growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

The economic downturn was brutal for the auto industry, with General Motors and Chrysler declaring bankruptcy. Ford, GM, and Toyota posted big losses during the financial crisis before returning to profitability in 2010. With an aging U.S. auto fleet, many analysts are predicting strong sales over the coming years.

The Foolish bottom line
Although a few years of dividend growth under its belt will be necessary before we could consider Ford a dividend dynamo, with a modest payout ratio and manageable debt, Ford exhibits a clean dividend bill of health. If you're looking for some great dividend stocks, check out "Secure Your Future With 11 Rock-Solid Dividend Stocks," a special report from the Motley Fool about some serious dividend dynamos. I invite you to grab a free copy to discover everything you need to know about the 11 generous dividend-payers -- simply click here.

Ilan Moscovitz doesn't own shares of any company mentioned. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors and Ford Motor and creating a synthetic long position in Ford Motor. 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.


Read/Post Comments (3) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 09, 2012, at 7:14 AM, ESAA1 wrote:

    Can you check your math? Do the Ford numbers reflect just automotive debt or total debt including their financing arm? Doesn't quite look right when Ford's automotive company debt is now in the range of $13 billion.

  • Report this Comment On February 09, 2012, at 8:30 AM, JustMee01 wrote:

    @ESAA1:

    I think that debt to equity ratio is for the full consolidated corporation. I agree that's inappropriate. Most of it is working capital for Ford Credit and shouldn't be included. You just can't look at financials the same way, and FC should be split out, before D/E ratios will mean anything. Beyond that, all cyclicals coming out of a spot of trouble will appear to have high leverage ratios, because of prolonged losses. That erodes equity and bloats the ratio by dropping the denominator. It's not as meaningful in this case, since numbers are skewed. In addition to that payout ratio, you need to focus on three things: coverage ratio, discipline on improving that ratio by reducing debt, and service cost trends. (1) Ford's coverage ratio is fine at this point in time, as the author outlines. (2) Ford has paid down much of its Automotive debt, and is commited to getting it down a bit more. I'd like to see more of the unsecured retired faster though. They have capex needs at the moment in Asia, so they've choosen to not take it down to their target yet. (3) Interest rates are okay, given where Ford came from, and their borrowing costs will not rise from here, since it's far more likely that credit ratings will improve from here, not decay. So, the cost of that debt is not going to balloon. To me, that adds up to safety from a divi perspective.

  • Report this Comment On February 09, 2012, at 8:02 PM, TMFMarlowe wrote:

    Yeah, gotta remember that Ford owns a (healthy) bank. This throws lots of people off. Ford's "automotive debt" -- its real debt -- was just $13.1B as of 12/31/11:

    http://media.ford.com/article_display.cfm?article_id=35878

    GM reports next week, but its debt as of year-end was probably in the same neighborhood, possibly a little lower (like $11b-ish).

    John Rosevear

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