Dividend Safety Analysis: Ford Motor Company (F) by Simply Safe Dividends
The best investment advice is to approach high yield stocks with caution.
Ford’s case is a little curious because the company just set an all-time quarterly record in its automotive segment with pre-tax profit of $2.8 billion – more than four times the amount of regular dividends paid ($600 million).
With results like those, what could investors be worried about?
With U.S. vehicle sales sitting near their prior historical peaks, there is no shortage of anxiety in the market that another downturn could be right around the corner.
In fact, since 1980, the company has cut its dividend four times. The chart below depicts the seasonally adjusted annual rate (SAAR) of U.S. auto sales (green line) and Ford’s total dividends paid (blue bars) from 1976 through the first half of 2016.
The red circles denote periods when Ford reduced its dividend and are wrapped around the trend observed in U.S. vehicle sales during those times.
Source: FRED Economic Data, Simply Safe Dividends
Three of Ford’s four dividend cuts were approximately 10 years apart from each other.
With the company’s last dividend cut occurring in 2006, investors are wondering if history could repeat itself.
However, while the business is nowhere close to being considered a blue chip dividend stock, the 2016 Ford is a much different company than it was in past decades.
Let’s take a closer look at why the company cut its dividend several times in the past 40 years and whether or not another dividend cut could be on the horizon.
1980 Dividend Cut
Ford’s first dividend reduction during the period I analyzed took place in 1980. According to the Washington Post, U.S. automakers’ production was down more than 30% compared to the prior year.
Lower production volume meant that Ford’s large fixed cost base from its manufacturing plants was spread across fewer vehicles, crimping profitability.
Ford posted a record loss of $164 million in the first quarter of 1980 and was on track to lose more than $1 billion for the full year.
General Motors, the largest company in the industry, was the only auto manufacturer that managed to turn a profit.
All of Ford’s losses were attributable to its North American operations, which more than offset profits from non-auto and foreign subsidiaries.
Ford made its biggest dividend cut in its history (at the time), reducing its payout by 70% in 1980 before completely eliminating the dividend in 1982.
With a loss per share of $12.83, $9.40, and 75 cents in 1980, 1981, and 1982, respectively, Ford had little choice but to cut the dividend, which amounted to approximately 16 cents per share in 1979.
Ford’s initial 70% reduction in the dividend saved the company nearly $340 million per year.
Ford began paying dividends again in 1983, but it wasn’t until 1986 that its quarterly payout exceeded the dividend amount it was doling out in 1979. That is far too long for income investors to wait.
To conclude, Ford’s 1980 dividend cut was caused by weak industry conditions and unproductive manufacturing facilities, particularly in North America.
While there’s not much Ford can do about the cyclical nature of automotive sales, it clearly has room to improve the cost-effectiveness of its production facilities.
1991 Dividend Cut
Ford’s next dividend cut took place in early 1991.
After sinking to an annual pace of 9-10 million vehicle sales per year in the early 1980s, U.S. vehicle sales rallied sharply to more than 15 million annual units by the end of the decade.
However, U.S. vehicle sales fell nearly 30% from an annual pace of 16 million in January 1990 to less than 12 million just one year later. The U.S. economy had fallen into a recession, reducing demand for vehicles, and the Persian Gulf War also created challenges.
In response to difficult market conditions, management lowered the company’s quarterly payout by 53%, dropping it from 75 cents per share to 40 cents.
Ford was also involved in a $3 billion cost reduction plan at the time. Reducing the dividend saved more than $650 million per year.
Interestingly enough, Ford had previously stated that it did not want to lower its dividend if profits fell during the next normal cyclical downturn. The company had even resisted pressure to significantly boost its dividend during the boom times of the 1980s.
What was management’s excuse when the dividend was ultimately cut? Here’s what Ford’s chairman Harold Poling said:
“The situation we face today is much more than a normal trough in the business cycle and in automotive earnings. The automotive industry is in the midst of one of the toughest and most challenging periods it has ever confronted.”
Indeed, Ford reported a loss in excess of $600 million during the first quarter of 1991 compared to a profit of more than $500 million during the same period just one year earlier.
General Motors, Ford, and Chrysler lost a combined $3 billion during the first quarter of 1991 – the worst period ever for the automotive industry at the time (cyclical, capital-intensive businesses can be lethal).
Ford wasn’t the only company to cut its dividend during this time. Many companies enjoyed a strong gain in profits (and corporate largesse) during the 1980s and somewhat lackadaisically paid out generous dividends to keep shareholders satisfied.
According to the Commerce Department, American corporations had nearly doubled their payout ratio from 23% in 1980 to 44% in 1990. Debt was used to finance much of the dividend growth during this period marked by strong business conditions.
Of course, nothing lasts forever. Once the U.S. economy entered a recession, many dividends proved to be vulnerable as companies were burdened with interest payments and increasingly squeezed for cash.
It wasn’t until 1997 that Ford’s dividend surpassed its prior peak reached in 1990. Once again, income investors were left hanging.
2002 Dividend Cut
After bottoming out in the early 1990s, Ford’s dividend more than tripled over the next decade.
The company’s next dividend cut was announced in early 2002 when management cut Ford’s quarterly dividend from 10 cents per share to 5 cents, representing a decline of 50%.
The U.S. economy had entered a recession in recent years, but U.S. vehicle sales remained surprisingly resilient – above a 15 million annual rate throughout the entire period.
Prior to announcing its dividend reduction, Ford had more than $16 billion in cash, and analysts didn’t believe the company needed to slash its dividend.
Even Ford’s CFO said he didn’t see any reason to suggest Ford cut its dividend during the summer of 2001.
Why then did Ford cut its dividend?
The company was experiencing intense competition from low-cost foreign competition, incurring heavy marketing costs