Companies all around the world faced a worrying decision at the beginning of last year’s coronavirus pandemic.
- Would they choose to focus on cash retention to bolster balance sheets in the face of an unpredictable future, or
- would they seek to continue making dividend payouts and other financial perks and incentives to reassure investors everything was alright?
For the Ford Motor Company (F), the dilemma was a short-lived one, since very early in the COVID-19 crisis the car manufacturer settled on its answer: cut dividends and borrow heavily on its existing credit lines.
The firm had witnessed its share price half from the beginning of 2020 through to March that year, and it was obvious that action had to be taken. However, the solution it arrived at wasn’t without its own risks; the company borrowed a total of $15.4 billion at a time when revenues were dropping because of its business being put out of action – and the suspension of what many considered a reliable and fairly generous dividend was harmful to the brand’s reputation.
Still, the decision appeared to play out as planned. Ford’s share price recovered well since the lows of last year, and a good recent quarterly earnings report brought optimism for the firm. But, the question for the company now was: should Ford reinstate its dividend – and when?
Ford’s Dividend History
Ford’s decision last March to stop paying its dividend wasn’t an unprecedented event for the firm. The company halted its payout during the years 2006 to 2011, but since then maintained a steady $0.15 dividend every quarter, with a special dividend in Q1 for 2016, 2017, and 2018.
The company’s dividend yield has shown some volatility over the years, due mainly to its fluctuating share price, and not so much its absolute dividend payout.
Indeed, its yield just prior to the suspension of its dividend in 2020 would have been around three times as high as it would have been now after the company’s nearly three-fold increase in share price since then – assuming, of course, that the dividend rate remained the same.
Will Ford Reinstate its Dividend?
According to Bill Ford, executive chairman of the Ford Motor Company and the great-grandson of its founder, Henry Ford, the goal of reinstating the firm’s quarterly dividend was a “very, very high” priority for the company. But does this mean it’s going to happen?
Investors could point to Ford’s strong financial performance as a sign that the company is ready to begin paying out its dividend again.
In its latest SEC filing, Ford reported net income of $3.3 billion – its best since 2011 – and a year-on-year increase of $1.9 billion on total revenues of $36.2 billion. The company’s cash balance has also been rising the last couple of quarters, and it now claims to have “ample liquidity” of nearly $48 billion.
The firm’s pivot towards a focus on electric vehicles also suggests that it has a clear strategy for the future.
As time goes on, Ford will seek a higher margin business model – which will necessarily entail a shift in the kind of vehicles it sells – while it envisages becoming the lead company in the electrification revolution. Ford’s Mustang Mach-E, an all-electric SUV, is already on sale, and it is rapidly gaining recognition as a real competitor to Tesla’s own efforts in the space.
However, a reliance on making a success of the electric vehicle market could actually setback any efforts to renew the dividend payout. Jim Farley, Ford’s recently appointed chief executive officer, was brought onboard precisely to engineer this turnaround for the company; but, despite his best efforts, the global chip shortage could derail these plans.
Farley has stated that he and the business are “all in” on electric vehicles now, and that Ford is “accelerating” its plans to subsume electric vehicles into its product cycle plan. Bombastic talk like this often comes before a fall – and, if things don’t pan out as expected, the future of the dividend lies in doubt.
Is Ford’s Current Valuation Realistic?
If the company management wanted to, would Ford be able to cover the costs of reissuing its dividend payout today?Ultimately, this would come down to whether the firm had enough cash on hand to fund the payout.
Ford’s liquidity has been increasing every quarter since Q1 2020, and the company seems happy that it has enough to finance its expansion into the electric and autonomous vehicle market. But does it have enough to cover a newly instituted dividend too?
History suggests that Ford wouldn’t be in a rush to do so if it couldn’t afford it – note its 5-year hiatus from 2006 onward during the time of the Great Recession – but those comments of Bill Ford’s do imply otherwise.
Ford’s profitability is also increasing – with its year-on-year EBIT growth standing at a very impressive 491% – pointing to the possibility that sustaining a new dividend payout should be quite high too.
Its forward price-to-sales ratio is better than the sector median at 0.49, showing that its current stock price ranging between $10 and $20 is undervalued; again, another sign that its financial health – which is so important for measuring a dividend paying company – is in good stead.
Will Ford Reinstate Its Dividend? Final Thoughts
Regardless of whether Ford reissues its dividend again, the company is positioned as a good buy simply because of its current share price and its powerful vision for the future. But a newly minted dividend would make this business all the more enticing.
The firm is on record now as recognizing the importance of the dividend to its brand, and it is likely just a matter of time as to when we’ll see this happen.
The company’s next earnings report is out in July; another good quarter, and we could expect the dividend back then. And if Ford’s stock keeps on appreciating in the interim, now might just be the best opportunity to buy for quite some time.
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.