Please ensure Javascript is enabled for purposes of website accessibility

How Safe Is Ford's Dividend?

By John Rosevear - Dec 27, 2017 at 6:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Is Ford’s 4.7% dividend too high to sustain?

With a dividend yield around 4.7%, Ford Motor Company's (F 0.25%) stock looks pretty attractive to dividend-minded investors. But before buying a stock because of a fat dividend yield, it's crucial to understand whether the company is likely to be able to continue paying the dividend over time.

And here's the thing to remember about Ford and other auto stocks: Automaker stocks are cyclical. Profits boom during good times, when new-vehicle sales are high; but they sag (or disappear) when sales slump, as in a recession. Historically, some automakers have even swung to losses during not-so-awful recessions, and losses can lead a company's board to cut dividends. 

Is Ford's dividend at risk? Let's take a closer look.

Ford's dividend: Key stats

Metric Ford
Current quarterly dividend per share $0.15
Current yield 4.75%
Payout ratio 54.55%
Last increase January 2015

Data sources: Thomson Reuters and Ford Motor Company. "Last increase" is the date the increase was officially declared, not the date it was first paid. 

A black 2018 Ford F-150 pickup truck on a snowy street.

The story of Ford's strong profit starts with its huge-selling pickup trucks. The market-leading F-150 got a new face and new features for 2018. Image source: Ford Motor Company. 

Why Ford hasn't raised its dividend despite record profits

Ford posted an all-time record operating profit in 2015, and followed that up with its second-best operating profit ever in 2016. But Ford hasn't raised its dividend since early 2015. Why not? 

The truth is, it did raise its dividend -- sort of. After that record 2015 profit, Ford's board of directors voted to pay a one-time supplemental dividend of $0.25 per share, or around $1 billion in total. That was paid in March 2016. It paid a second supplemental dividend a year later, this time of $0.05 per share (or roughly $200 million).

Why did Ford choose to pay these one-time supplemental dividends instead of just raising its regular dividend? Here's how Ford's chief financial officer, Bob Shanks, explained it in September 2016: 

We expect Ford's performance to be strong through 2018 -- with our core business improving, allowing us to invest in the emerging opportunities that will ensure our future success. Our capital allocation continues to be disciplined and to deliver strong returns, and we are fully prepared for a downturn. As a result, we plan to offer a secure regular dividend through the business cycle with an option for upside on investments to keep our core business strong and to win in emerging opportunities.

Simply put, Ford expects to be able to continue paying that regular $0.15 quarterly dividend throughout a recession as well as in good times: "Through the business cycle," as Shanks said. 

A slide explaining that Ford plans to pay a regular, sustainable dividend, while using supplemental dividends to return additional cash to shareholders.

As explained on this slide from Ford's 2016 investor day presentation, the company plans to sustain its regular dividend payments throughout the business cycle. Image source: Ford Motor Company. 

Of course, a severe, protracted recession would test that promise, and Shanks has been candid about how that would play out. Ford maintains a hefty cash reserve intended to fund future-product development during a severe recession, when its profits may be thin or nonexistent. That cash reserve, which totaled $26.1 billion as of Sept. 30, is backed up by revolving line of credit ($10.9 billion as of Sept. 30). The point at which Ford would cut the dividend is the point at which its cash reserve is exhausted, when it's forced to tap that line of credit. 

What are the chances that Ford will be forced to cut its dividend? 

How likely is it that Ford would run through its entire cash hoard in a recession? My educated guess is that in a typical moderate recession, in which U.S. new-vehicle sales fall by 25% from current levels, Ford would probably burn through $5 billion to $7 billion in the first year. (General Motors(GM -0.55%) CFO, Chuck Stevens, recently estimated that GM would burn $5 billion of its cash reserve in a similar scenario.) 

Of course, Ford would burn cash at a higher rate if it began losing money. When would that be? Shanks has said on multiple occasions that Ford expects to be profitable as long as the annualized pace of U.S. light-vehicle sales (called the "SAAR", for "seasonally adjusted annualized rate") is above 10.5 million, roughly.

What's that mean? Here's a chart that shows the U.S. light-vehicle SAAR, for every month from June of 2008 through the end of 2010. ("Light vehicles" is the industry term for the kinds of vehicles consumers typically buy: cars, pickup trucks, and SUVs.) 

US Light Vehicle Sales Chart

U.S. light-vehicle sales. Data by YCharts.

As you can see, the SAAR fell below 10.5 million at the end of 2008, for several months in 2009, and for one month in the first part of 2010. This was an unusually severe recession by historical standards, but today's Ford -- with its current cost structure and cash reserve -- would probably have sailed right through it, paying its dividend every quarter as scheduled. 

So how safe is Ford's dividend? 

No dividend is 100% safe, of course. But Ford's solid profitability in good times, and the huge cash reserve it has in place to see it through less-good times, make its dividend a pretty good bet. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ford Motor Company Stock Quote
Ford Motor Company
$12.04 (0.25%) $0.03
General Motors Company Stock Quote
General Motors Company
$34.63 (-0.55%) $0.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.