Analysts are starting to raise concerns in the wake of Ford Motor Company's (NYSE:F) dismal second-quarter earnings report. The Blue Oval reported that its net income fell 44% to $1.1 billion and cut its guidance for the year on growing troubles in China and Europe.
Ford executives have promised that improvements are on the way, part of a larger restructuring plan that the company has yet to fully explain. But Wall Street is growing impatient. At least one analyst is now thinking the previously unthinkable: Ford might have to cut its dividend.
That wouldn't be good. Ford's beaten-up stock has made the dividend a rich one, yielding about 6% at current prices. That dividend yield has been a key part of the investment case for the stock. Is it really at risk?
I'm a Ford investor and I'm growing concerned. Here's why.
Why this analyst thinks Ford will cut its dividend
One of the most worrying numbers in Ford's second-quarter report was the total equity income from its Chinese joint ventures: just $3 million, down from $167 million a year earlier. Ford's sales in China fell sharply in the first half of the year, and the company is scrambling to prepare several key new products for that market, starting with a new affordable SUV that will arrive early next year.
But in the meantime, Ford's cash flow is suffering without that China income, and that has one Wall Street analyst fearing for Ford's dividend. In a research note released this past Monday, Berenberg analyst Alexander Haissl pointed out that the $1.4 billion in equity income that Ford received from its China ventures last year covered 60% of its dividend last year -- and much of that may be gone in 2018.
Meanwhile, he thinks Ford isn't generating enough cash elsewhere to properly sustain dividend payments at the current level. "The lack of this support [from China] will expose the weakness in the company's core cash generation," Haissl wrote.
Haissl thinks Ford will have to cut its quarterly dividends by a third, from the current $0.15 per quarter to $0.10, starting in 2019. He has a "sell" rating on Ford, with a price target of $7. (Ford's stock was trading around $9.90 on Friday morning.)
Is he right that Ford's dividend is now at risk?
Ford's corporate structure and past guidance give us good reasons to think that the dividend is safe at current levels. But there are also reasons for some doubt.
1. Corporate structure: Ford is still a family business. Most Ford investors know that the automaker is unlike many other big companies in that it's still in many ways a family business. The Ford family has a controlling vote via a special class of shares, and its interests are represented inside the company by no less than Ford's chairman, Bill Ford. He's Henry Ford's great-grandson.
The thing to know is that those special family shares pay the same dividend as Ford's common stock, and that's an important source of income for some family members. Ford paid a dividend every year from its IPO in 1956 until 2006, when Ford was in dire straits -- and then-CEO Alan Mulally cut spending sharply to try to save the company.
Mulally's effort was a success, of course, and Ford resumed paying dividends in 2012. More to the point for our purposes, the experience showed that the Ford family isn't unreasonable: They were willing to accept a suspension of dividend payments when it was absolutely necessary. But short of dire circumstances, which Ford isn't in right now, I suspect they'd rather avoid any dividend cut.
Ford's current dividend has been set with that in mind. Measured against the cash that Ford was generating just a couple of years ago, the company's dividend looked quite conservative -- and in those flush years, Ford chose to pay an extra, special dividend rather than raising the regular dividend to levels it might not have been able to sustain.
2. Past guidance: Ford plans to sustain its dividend unless things get dire. Ford has said in the past that it won't cut its dividend unless things get dire. In Ford's Investor Day presentation in September 2016, CFO Bob Shanks said that Ford's intent is to sustain its current dividend payment through the next recession.
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. [Emphasis added.]
At the time, the thinking was that Ford's hefty cash reserve will allow it to sustain dividend payments even if its profits disappear during a steep recession. As of the end of the second quarter, Ford had $25.2 billion in cash and another $10.9 billion in available credit lines. In a protracted recession, Ford would probably spend most of that cash before drawing on its credit lines.
Based on what the company was saying in 2016, I would expect Ford's dividend (and a lot of other spending) to be cut at the moment it became clear that Ford would have to tap the credit lines.
3. Two reasons for doubt. We are nowhere near that point right now, of course. But I'm not 100% sure that Ford's 2016 dividend guidance is still operative, for two reasons.
First, Ford's situation is worse now than the company's leaders expected in 2016. In that same presentation, Shanks said, "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." (Emphasis added.)
As we saw in Ford's second-quarter earnings report, the company's performance has slipped earlier than Shanks expected in September of 2016.
Second, Ford is under new management. While Shanks is still Ford's CFO, CEO Jim Hackett replaced Mark Fields abruptly in May 2017. Many things about Ford have changed since then.
The takeaway: It's time for Ford to say something
Ford had planned to give an extensive presentation to investors in September, explaining Hackett's plans to overhaul in depth. But in its second-quarter earnings presentation, Ford said that presentation has been indefinitely postponed while it works to reverse its slide in China and growing problems in Europe.
My view as a longtime Ford-watcher (and investor) is that there are lots of questions Ford needs to answer, soonish. But I think the dividend question has now risen to the top of the list: Does Ford still intend to maintain its dividend payments at the current level through the business cycle?
Until Ford confirms that intent, I think investors should be cautious.