Is Ford's Dividend Premature?http://www.fool.com/investing/general/2011/12/09/is-fords-dividend-premature.aspx John Rosevear
December 9, 2011
Ford (NYSE: 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?
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 (NYSE: TM ) and Honda (NYSE: 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?
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