Ford vs. Johnson Controls: Which Stock's Dividend Dominates?

Two auto industry leaders square off in a battle of dividend fundamentals.

Jan 12, 2014 at 2:15PM

Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.

But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two auto-industry companies (one a major automaker, the other a component supplier) will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tape
Established in 1903, Ford (NYSE:F) is the one of world's largest automobile manufacturers, and was one of the industry's early pioneers -- most notably of the assembly line manufacturing process, which made Ford a household name and the Model T a car for the masses. Headquartered in Dearborn, Mich., the company operates about 65 manufacturing facilities around the world and also holds a minority stake in Japan's Mazda. Ford generates more than half of its sales in North America, and also ranks among the top 10 companies on the Fortune 500 list. Ford sold its U.K. subsidiaries Jaguar and Land Rover to Tata Motors several years ago, and also discontinued its entry-level luxury brand Mercury in 2011 to focus more on core brands. Ford's financing arm, Ford Motor Credit, is also one of the leading auto finance companies in the United States.

Established in 1885 by electric room thermostat inventor Warren Johnson, Johnson Controls (NYSE:JCI) is a highly diversified technology and industrial leader, with about 170,000 employees serving customers in more than 150 countries worldwide. It has expanded its product portfolio from temperature systems to include car batteries and interior systems for electric and hybrid vehicles, and also produces HVAC systems for commercial buildings. This diversification has occurred on the back of aggressive growth strategies, which has included the acquisitions of Prince, York International, and Skymark International. Johnson's newly appointed CEO and chairman, Alex Molinaroli, has recently decided to divest its vehicle-based control system business, which reduces the company's stake and influence in the auto industry.

Statistic

Ford

Johnson Controls

Market cap

$59.4 billion

$34 billion

P/E ratio

11

30

Trailing 12-month profit margin

3.9%

2.8%

TTM free cash flow margin*

2.2%

3.1%

Five-year total return 

600.5%

210.7%

Sources: Morningstar and YCharts.
*Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.

Round one: endurance (dividend-paying streak)
Ford began making quarterly dividend payouts in 1956, and paid for almost five decades until late 2006, after which it discontinued shareholders' distributions for more than five years. On the other hand, Johnson Controls dividend payouts date back to 1887, which equals a 127-year dividend-paying streak. That's an easy win for Johnson Controls.

Winner: Johnson Controls, 1-0.

Round two: stability (dividend-raising streak)
Ford's dividend-raising streak only begins in 2013, since the company did not any dividends between 2007 and 2011. By contrast, Johnson Controls kept its dividend payouts firm during the most of the past decade and only resumed increasing its payouts in 2011. It's a closer contest, but Johnson wins this one as well.

Winner: Johnson Controls, 2-0.

Round three: power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's look:

F Dividend Yield (TTM) Chart

F Dividend Yield (TTM) data by YCharts

Winner: Ford, 1-2.

Round four: strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's look at the growth in payouts over the past five years.

F Dividend Chart

F Dividend data by YCharts

Winner: Ford, 2-2.

Round five: flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:

F Cash Dividend Payout Ratio (TTM) Chart

F Cash Dividend Payout Ratio (TTM) data by YCharts

Winner: Ford, 3-2.

Bonus round: opportunities and threats
Ford may have come from behind to win the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.

Ford opportunities

Johnson Controls opportunities

Ford threats

Johnson Controls threats

One dividend to rule them all
In this writer's humble opinion, it seems that Ford has a better shot at long-term outperformance, thanks to its long legacy in global auto markets, and its rising star among global consumers after decades in which it struggled with second-rate perceptions. Ford's new models could also help it to gain critical market share over the next few years. Johnson's innovative and highly efficient solutions and systems continue to provide an economic moat against its peers, but the company's industrial focus has left it battling sluggish economic growth in both maturing and emerging markets worldwide. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!

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Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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