Is Ford a Good Dividend Stock?

Is Ford a Good Dividend Stock? Ford is an American icon. Founded in 1903 by Henry Ford, the company was first in the world to mass produce automobiles. Ford developed an assembly line technique to maximize efficiency, and from 1913 to 1927, it produced an astonishing 15 million Model Ts.

Ford showed its on-going strength and commitment to growth through the 20th century, acquiring and developing brands like Lincoln, Mercury, Jaguar, Aston Martin, and car rental company Hertz. 

However, the company has struggled since the start of the 21st century. From 2000 to 2008, Ford divested Hertz, Aston Martin, Jaguar, and Land Rover in an effort to shore up its core business. When the 2008 – 2009 financial crisis was at its peak, it appeared that these moves were almost prophetic.

Ford was able to avoid bankruptcy, unlike its primary US competitors, General Motors and Chrysler. 

Corporate Credit Rating Agencies Weigh In

Unfortunately, these moves weren’t enough to protect the company from financial challenges in recent years. Ford’s credit rating was already in question before the March 2020 market crash. Moody’s downgraded the company’s credit rating to speculative or junk status in September 2019, rapidly followed by an S&P downgrade to BBB-. 

At that time, some analysts asserted that Ford would be unable to withstand another recession, and bankruptcy was all but certain. Following the March 2020 economic disaster, Ford lost its investment-grade credit rating with S&P, as analysts became concerned that factory shutdowns would result in financial catastrophe. 

Today, investors are questioning whether there is any way back for the company. In other words, Ford shares were once a smart choice for income investors, thanks to reliable dividends, but is Ford a good dividend stock today?

Why Buy Ford Stock?

It’s true that things have been looking a bit grim for Ford in the first half of 2020, but the iconic American automaker isn’t going down without a fight. Its strategy is to eliminate car production, which has been riddled with losses. Instead, it will put its full attention into trucks, SUVs, and crossovers. 

The announcement that Ford is bringing back the Bronco was met with great excitement. Reviews for the new vehicles are overwhelmingly positive, and by all indications, consumers are ready to buy.

If further disruptions don’t derail the economy again, Ford may see its profits rise significantly in coming years. 

The Dangers Ahead For Ford

On the other hand, the new truck, SUV, and crossover-based strategy may not be enough to offset the losses that would result from any one of several possible developments over the next year. For example, there is no vaccine for COVID-19 right now, though many are in the trial stage.

One or more may prove to be safe and effective in the near future, but in the meantime, cases are rising. It is hard to know what the economic fallout will be if the recovery stalls or reverses course.

In another example, though Ford has long since divested from Hertz in terms of ownership, the rental company’s May 2020 bankruptcy could have a devastating impact on American car and SUV sales.

It is not yet clear what steps Hertz will take to resolve its debt. One option is to sell off a portion of its fleet. According to 2019 figures, Hertz operates more than half a million vehicles in the United States. If a large percentage of those hit the market, it could tank used car prices for quite some time. 

That matters to Ford’s profits, because Ford Credit is a major contributor. In 2019, the credit arm of the company brought in $3 billion of pre-tax profit, while the automotive unit generated $4.9 billion.

Much of Ford Credit’s revenue comes from leasing vehicles, but leasing model only works if vehicles can be resold at certain prices. Should the bottom drop out of the resale market, Ford Credit will suffer.  

Ford stock prices have recovered somewhat since their shocking 52-week low of $3.96. Investors who are ready to cut their losses and move on based on these risks might not get a better opportunity than the one they have today. 

Is Ford a Good Dividend Stock?

From January 2012 to March 2020, Ford dividends increased steadily. In fact, the final quarterly distribution of 2019 yielded 6.6 percent. However, when the market crashed in March 2020, Ford’s leaders scrambled to preserve cash. One of the first steps towards that goal was a suspension of dividends. 

Of course, Ford wasn’t an outlier in deciding to suspend dividends. A wide variety of companies across industries did the same.

The idea was to temporarily halt dividend payments for the duration of the crisis, but Ford investors are skeptical. It’s anyone’s guess when dividends might resume – and if there is more volatility in the market or the Broncos don’t do as well as expected, dividends might not be paid for years. In other words, Ford was once a good dividend stock, but for now, it’s a poor choice for income investors.  

Is Ford Dividend a Value Trap?

A dividend trap occurs when a company’s dividend yield is higher than the company can realistically support over time. Alternatively, this phenomenon can occur when business leaders lack the vision needed to develop a strategy for growth and expansion, so they choose to hand out available cash instead of reinvesting in the company’s growth. 

In either case, the yield tempts income investors, who then plan their finances with the expectation that they can look forward to the high-yield long-term. When dividends are inevitably cut, these investors’ financial circumstances are dealt a significant blow. 

Ford, unfortunately, qualifies as a dividend trap in that it showed strong, reliable yields for some time. However, those yields were simply not sustainable in the face of particularly challenging economic scenarios. Investors who had relied on Ford dividends prior to March 2020 may have gotten caught in the value trap. 

The good news is that new investors will no longer be swayed by big dividend promises. Those considering adding Ford to their portfolios now will understand that the investment is extremely high-risk, and there are no dividends being paid.

With that said, those who have a high tolerance for risk, may wish to consider Ford stock for the long-term, in hopes of a dramatic turnaround and impressive rewards. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.