Good news for Ford (NYSE: F) shareholders: On Wednesday, Ford's board declared a second-quarter dividend of $0.05 per share on the company's common stock.
That's not much of a surprise, of course. It follows on the heels of Ford's first-quarter dividend, which was also $0.05 per share -- and also was the first dividend paid on Ford's common stock since 2006.
That first dividend was a major milestone for the Blue Oval, a sign that its dramatic turnaround was all but complete. This one marks progress, but it's also a reminder that Ford still has work to do.
Easing off the gas pedal
Ford's current dividend isn't exactly the stuff of retirement-building dreams: At current prices, the company's dividend yield is about 1.6%, pretty thin stuff as big-company dividends go. But as outgoing CFO Lewis Booth has said, Ford is inclined to be cautiously optimistic: As business continues to improve, it's reasonable to expect that the company's dividend payments will increase.
"But Ford's in pretty good shape now," you might say, and all things considered, you'd be right. Ford earned $8.8 billion in 2011 before taxes and special items, its third annual profit in a row. U.S. sales have been strong, and Ford's recent emphasis on fuel economy is paying off as gas prices rise. Its upcoming new Fusion sedan looks like a winner, and its acclaimed Focus compact is finding more and more buyers.
So what's the problem? Actually, there are a few.
There's work still to be done
The cornerstone of Ford's turnaround plan was the "One Ford" idea -- simply put, to simplify Ford's global product offerings into a single line of cars and trucks that could be lavished with attention and made into competitive class leaders anywhere in the world. That has worked out pretty well for the most part, and the last pieces of that plan are coming to market this year.
But having great products in markets around the world doesn't help all that much if regional economies are in rough shape. While Ford's European operation isn't hemorrhaging money like General Motors' (NYSE: GM) Opel subsidiary, it's also not profiting: Ford Europe lost $190 million last quarter, and Booth has said that Ford expects to lose up to $600 million in the region this year.
As bad as that sounds, it could get even worse. European new-car registrations fell 9.2% in February versus the year before. While sales in Germany -- Europe's largest market -- were essentially flat, they were down sharply in both France and Italy, Europe's second- and third-biggest markets. Analysts still expect the European market to contract by about 5% this year, the fifth straight annual decline -- and one that will worsen the already-bad problem of too much manufacturing capacity in the region.
Asian growth may be stalling
Meanwhile, Ford's ambitious plans to find big growth in China have stumbled, as that market's sales fell sharply through the first two months of the year. Market leaders GM and Volkswagen (OTC: VLKAY) have managed to gain ground, but Ford's year-to-date sales in China were off 16% through February.
This isn't likely to be a long-term problem -- there are still lots of Chinese who don't own cars, and Ford's products are competitive there -- but it is a source of concern. Ford is investing aggressively in China, just introduced the latest Focus there, and plans to roll out 14 more new vehicles by mid-decade.
Finally, while Ford's financial house is in much better order than it was a few years ago, there's still work to be done. The company still had over $13 billion of debt at the end of 2011, and a global pension liability of more than $15 billion. Ford is working to reduce those numbers and neither is an acute concern, but the company's dividend is unlikely to increase significantly until those obligations are dealt with.
In the end, Ford's board may hold off on raising its dividend until the company receives its long-sought credit upgrade to investment-grade status. That will reduce the company's ongoing borrowing costs significantly, and serve as an important psychological milestone for investors -- and might be the final key to making Ford a stock sought out for its dividend.
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