Ford Motor Company (F 0.69%) is one of the largest and oldest automakers in the world. The company has been paying dividends to its shareholders since it went public in 1956 and currently offers a generous dividend yield of roughly 4% on an annualized basis.
However, Ford also has a history of cutting its dividend during periods of financial distress, such as the 2008 to 2009 global financial crisis and the 2020 COVID-19 pandemic. As a result, passive-income investors might be wondering whether Ford's dividend program can withstand a marked economic downturn in the second half of 2023.
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Here's a brief look at the company's dividend history, financial performance, growth prospects, and payout ratio. Read on to find out more about the sustainability of Ford's dividend program.
A mixed bag
Dividend investors love a sure thing. However, Ford's dividend history doesn't exactly paint a reassuring picture. The company has raised its dividend several times since 1956 but has also slashed its dividend on numerous occasions over this same period.
The most recent dividend cut occurred in March 2020 when Ford suspended its quarterly dividend of $0.15 per share, due to the impact of the COVID-19 pandemic on its operations and cash flow. The company resumed its dividend payments in June 2021 but at a reduced rate of $0.10 per share. Due to the cyclical nature of its business, Ford simply isn't an all-weather income stock.
On the plus side, Ford's financial performance has been improving since the pandemic-induced slump in 2020, when it posted a net loss of $1.3 billion for the year. In the first quarter of 2023, for example, the company reported positive net income of $1.8 billion and adjusted free cash flow (FCF) of $693 million. Ford also reaffirmed its 2023 outlook, calling for a healthy $6 billion in adjusted FCF for the full year.
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Key Data Points
Ford's near-term growth prospects are also promising, for the most part, thanks to its investment in electric vehicles (EVs). The company has launched several new EV models, such as the Mustang Mach-E and the F-150 Lightning, which have been greeted by strong customer demand and positive reviews. Ford also plans to invest $50 billion in EV development by 2026 in an effort to secure a leading share of this high-growth market.
The company's EV initiative is projected to help boost annual sales by almost 10% over the course of 2023 and 2024. In 2025, however, bears anticipate a decline of more than 5% in annual revenue (relative to 2024), due to increasing competition in this increasingly vital segment. This possible trend reversal highlights the cyclical nature and relatively weak competitive moats in the automotive sector.
Ford's trailing-12-month payout ratio, a measure of how much of its earnings it pays out as dividends to shareholders, stands at 75.3%. That's a fairly high payout ratio for a large-cap company.
As a result, Ford's dividend may be on the chopping block in the event the global economy sputters in the back half of the year, especially if this weakness persists well into 2024. That being said, the company's dividend ought to be safe if Ford can meet -- or exceed -- Wall Street's near-term growth forecast.
The verdict?
All things considered, Ford's generous dividend payout doesn't come across as a particularly safe source of passive income. If demand for new vehicles softens later this year in response to a weaker economy, Ford may have to rethink its dividend policy.
After all, its elevated payout ratio doesn't give the legacy automaker much room for error. As a result, passive income investors may want to take a cautious approach with this high-yield dividend stock right now.
