Dividends are great. That's it. The end. You can all go home now.
All joking aside, dividends can be powerful wealth creators and can turn a good stock into a great investment. If you find a company with a sound business strategy that you believe in, an extra quarterly dividend check is icing on the cake.
Ford (NYSE:F) recently jacked up its dividend yet again, but some additional factors at the company could mean this is just part of a larger, more lucrative, shareholder value story.
A look at the numbers
Let's briefly recap the figures. Ford declared a first-quarter dividend of $0.15 per share on the company's outstanding Class B and common stock, which is a 20% increase from the $0.125 quarterly dividend paid in 2014. This is the latest dividend hike in Ford's consistent move to increase value returned to shareholders since the dividend was reinstated in December 2011 -- and, as you can see below, the dividend payout is healthier than it has been in some time.
While that chart is certainly showing an upward trend, there are more important takeaways for investors.
Investors often look at a company's ownership when deciding whether to buy the stock. More specifically, many investors ask if executive management's interests are aligned with their own. That is one factor that Ford often doesn't get credit for. The Ford family, including Executive Chairman Bill Ford, are exclusive owners of Class B shares. That means this recent dividend hike will pay the Ford family $42.5 million annually through that stock.
In addition, those shares hold 40% of shareholder voting power. While there are arguments to be made against this, investors can't argue that the family's interests are not aligned with individual investors'.
A new kind of investor
Another factor to consider with Ford's recent dividend hike is the dividend yield and how it could attract new investors. The dividend yield calculation is simple: Take Ford's annual dividend payment and divide that by the current stock price. In this case it works out to $0.60 divided by $15.22 (as of this writing), which equals a dividend yield of 3.9%. Here are a couple of reasons that number is more important than many realize.
Consider that the 3.9% yield is higher than Toyota's, Honda's, and General Motors' respective 2.5%, 0.66%, and 3.3% yields. But it goes beyond that. Income investors, who look for guaranteed income from their stocks and would have ignored Ford two to three years ago, would now be very interested in the automaker's near-4% yield. Opening the doors to that type of investor could increase demand for Ford's stock, and thus increase its price.
Spending cash all the right way
We also have to consider the sustainability of Ford's $0.15 quarterly dividend. The projected $1.64 earnings per share in 2015 would put Ford's dividend payout ratio at 36%. That's a very sustainable level and leaves Ford wiggle room in the event of a down cycle with potentially lower earnings. It also leaves the company room to increase its dividend in the years ahead.
Furthermore, while we can't expect Ford's operating related cash flow to randomly surge significantly higher, which would enable the company to splurge on increasing dividends or share repurchases, the company will be able to make near-term changes to its spending -- and that will be just as good for shareholders as spiking cash flow.
Let's look at 2013 and 2012 for an example. Two of the biggest drags on Ford's cash were its underfunded pension plan and its debt payments. The pension plan alone was underfunded to the tune of $18.7 billion at the end of 2012, so Ford dumped $3.4 billion into the plan in 2012 and a whopping $5 billion in 2013. For context, during that same time frame, Ford paid a total of $2.7 billion in dividends.
Ford anticipates dumping only about $1 billion annually into its pension plan. Also, by the end of 2015, the Blue Oval anticipates its debt level will be slashed from $14.9 billion as of third-quarter 2014 to roughly $10 billion. That is all great news for investors hoping Ford will use that cash to further increase its dividend in the years ahead, perhaps even significantly. Imagine if those respective dividend and pension payments of $2.7 billion and $8.4 billion were swapped. That will soon be possible, though don't expect dividend payouts to balloon that high, because Ford has other ways to spread its cash around. I believe the company will opt to return value to its investors via a large shareholder repurchase program, while also improving its dividend at the pace we've seen recently.
What it all means
Ultimately, Ford's recent 20% dividend hike is a good thing. But when investors consider that the interests of the Ford family are aligned with those of individual investors, the dividend yield could attract new investors, and Ford is close to being able to spend its cash on very different priorities, this seems to be the beginning of a much better story.