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Why Ford Motor Company's 6.8% Dividend Is Still a Good Bet

By John Rosevear – Dec 12, 2018 at 3:16AM

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High dividend yields can be a warning sign, but Ford's payout looks solid.

Ford Motor Company's (F 1.78%) dividend is hovering around 6.8%, a number that has put the Blue Oval on quite a few investors' radar screens. But whenever we see a dividend yield higher than 3%, we have to ask whether it's a warning sign: Is the stock cheap because the company is in trouble? If so, a dividend cut could be on the way.

Right now, Ford's stock is trading at lows we haven't seen since late in 2009, when the company's recovery was just getting underway. While Ford is in much better shape now than it was back in 2009, the stock is arguably down for some good reasons. 

Does that mean a dividend cut is likely? Let's take a closer look.

An orange 2019 Ford Ranger, a midsize pickup, on a snowy road.

New products like the 2019 Ranger pickup should help boost Ford out of the doldrums, assuming the economy stays healthy. Image source: Ford Motor Company.

Ford Motor Company's dividend: Key stats

Metric Ford
Current quarterly dividend per share $0.15
Current yield 6.8%
Payout ratio 46.9%
Last increase January 2015

Data source: Ford Motor Company. Payout ratio is calculated for the four quarters ended Sept. 30, 2018. "Last increase" is the date the increase was officially declared, not the date it was first paid.

Ford's dividend yield is quite high. That's what makes it of interest for our purposes, of course -- but as I mentioned above, it could also be a warning sign. One quick way to check that is to look at how Ford's price-to-earnings ratio, currently around 5.5, compares with that of its peers. 

Company Price-to-Earnings Ratio
BMW AG 5.6
Daimler AG 5.5
Fiat Chrysler Automobiles  6.6
General Motors 5.0
Honda Motor Co., Ltd.  4.7
Toyota Motor Corporation 7.6

Data sources: Thomson Reuters, General Motors. The calculation for General Motors excludes one-time items from its earnings, notably a large noncash tax-related accounting charge that GM took in the fourth quarter of 2017. 

As you can see, Ford's valuation isn't out of line. If Ford's valuation turned out to be far below its peers', then we would want to dig deeper to understand why before we decided whether to invest.

Ford's payout ratio is also somewhat high, though it's not the highest among major automakers. (Both Toyota and Subaru had higher payout ratios in their most recent fiscal years.) A too-high payout ratio is a strong hint that a company's dividend might not be sustainable. 

That's especially true with an automaker, which will see its earnings drop sharply as auto sales fall in a recession. 

Can Ford sustain this dividend through a recession?

Automakers like Ford are what we call cyclical businesses, meaning that their sales and profits rise and fall with economic cycles, specifically with consumer confidence. Because automakers have high fixed costs (factories, tooling, labor contracts), they require a fairly high level of sales just to break even. If sales fall below that breakeven point, the company will lose money. 

Ford, like most other global automakers, maintains a hefty cash reserve that is intended to keep its future-product programs fully funded through a recession, when its profits and cash flow may be thin (or even negative). As of Sept. 30, Ford had $23.7 billion in cash and another $11 billion in available revolving credit lines, for total liquidity of $34.7 billion.

What does that have to do with dividends? Ford has said repeatedly that its cash reserve will also be used to fund its regular dividend "through the cycle," meaning through a recession, for as long as it holds out -- and $23.7 billion should be more than enough to get Ford through even a steep recession. (Ford won't use its lines of credit to pay dividends. If it exhausts its cash, then the dividend, along with many other things, will probably be cut.) 

CFO Bob Shanks has said that maintaining the regular dividend through a recession is an important priority for Ford -- not least because the company wants to prove to investors that it can. 

But what about that high payout ratio? In an interview in August, Shanks pointed out that Ford's cash flow and income are set to rise: The company had been reinvesting most of the profits from its captive-finance arm, Ford Credit, back into that business in order to support a larger lending base. But Ford has decided to cap Ford Credit's receivables, meaning that those profits will now come back to Ford as cash -- around $1.6 billion to $1.7 billion per year, Shanks estimated, or enough to cover 70% of Ford's dividend. 

Hackett is shown standing in front of a white backdrop with a blurred Ford "blue oval" logo.

CEO Jim Hackett's "fitness improvement" effort should start to boost Ford in about a year. Image source: Ford Motor Company.

The upshot: The dividend is a strong argument for Ford's stock now

I should note that Ford has only promised to sustain its regular $0.15 quarterly dividend. In recent years, Ford has chosen to pay an additional supplemental dividend in the first quarter as a way to return extra cash to shareholders. (Why didn't Ford just raise its regular dividend instead? Because it wants to keep the regular dividend at a level it can sustain through a recession. See, there's a plan here.) 

Ford has a lot of restructuring work under way as it seeks to reach CEO Jim Hackett's goal of a sustainable operating margin above 8%. That work isn't likely to begin to pay off in a meaningful way until 2020, meaning that Ford's share price may linger in the doldrums for a while. But patient investors who buy at these prices and reinvest that fat dividend could be well rewarded when Hackett's efforts bear fruit in a couple of years. 

John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends BMW and Ford. The Motley Fool has a disclosure policy.

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