Exploring the Stability of Ford's Generous 6% Dividend Returns
Investors considering a stake in Ford Motor Company (F: 1.70%) face a myriad of factors as they construct their investment thesis. Last year, the automaker saw a spike in warranty costs, and by 2024, it's projected to lose approximately $5 billion from its electric vehicle division. Moreover, Ford has grappled with generating substantial earnings abroad.
However, for income-oriented investors, Ford's alluring 6% dividend yield presents an intriguing proposition. But is it secure in the face of Ford's challenges?
Dividend allure
There are several reasons why Ford's dividend appeals to investors. Firstly, its 6% yield is significantly higher than the S&P 500's (^GSPC: 1.00%) average yield of 1.2%. Moreover, reinvesting dividends over time can transform Ford into a wealth-generating machine. Consider the gap between Ford's total return – including dividends – and just its stock price increase over the long haul.
In fact, Ford's dividend is the sole avenue for generating wealth because the stock has plummeted 32% over the past ten years.
Additionally, investors might overlook that Ford often pays out supplemental dividends when it has excess cash flow or major achievements, such as selling its substantial stake in EV manufacturer Rivian years ago. Management targets allocating 40-50% of adjusted free cash flow (FCF) to investors.
Yet, investors are left pondering: Is the dividend secure?
Family ties
In a way, income investors delving into Ford stock for dividend income share common interests with the Ford family. Not many people realize that the family possesses special Class B shares, representing a tiny portion of equity but offering them the right to elect 40% of the company's board. Essentially, the Ford family retains control over the company, enjoying the same dividend as common shareholders.
As the family prioritizes lucrative and consistent dividends while guiding the company, it is less likely to slash the dividend unless extraordinary circumstances materialize. This is also why Ford has remained reluctant to engage in substantial share repurchase programs, opting for dividend payments instead as they offer more income to the Ford family.
Furthermore, despite Ford's challenges with EV losses, difficulties in China, and escalating warranty costs, the company still generates robust cash flow. Through the first nine months of 2024, Ford's adjusted FCF (excluding capital expenditures) clocked in at nearly $6 billion, showcasing a healthy balance sheet with $28 billion in cash and approximately $46 billion in total liquidity. Ford is also cutting back on approximately $12 billion in EV development projects, minimizing capital expenditures and subsequently boosting free cash flow.
Considerations
Ford's dividend plays a pivotal role in investors' decisions and the Ford family's interests alike. Ford has ascertained its commitment to rewarding shareholders predominantly through the dividend, rather than share buybacks. However, even though the automotive industry's cyclical nature might prompt investors to question the dividend's safety amid several challenges in its global business, concerns should be minimal in the absence of a significant calamity such as a pandemic or financial crisis.
Nonetheless, investing in Ford necessitates considering the fact that the stock price has remained stagnant for years, and the company must rectify a plethora of issues within its business to see the stock price surge.
[1] Seeking Alpha (premium subscription required): Ford's Dividend Safety Grade[2] MarketWatch: Ford's Q2 Earnings Miss Estimates, Largely Due to EV Strategies[3] Yahoo Finance: Ford Motor Company Quarterly Earnings Report (Q2 2024)[4] WhatFix: Ford Motor Company (F) Stock Analysis And Prediction
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Investors who are interested in finance and are considering investing in Ford Motor Company should consider the company's strong cash flow and robust balance sheet, which include $28 billion in cash and approximately $46 billion in total liquidity. However, any investment decision should also take into account the potential risks, such as Ford's projected losses in its electric vehicle division.
Due to its 6% dividend yield, which is significantly higher than the S&P 500's average yield, Ford's stock is an attractive option for income-oriented investors who are seeking financial returns. Furthermore, Ford often pays out supplemental dividends and targets allocating 40-50% of its adjusted free cash flow to investors, making it a potential source of reliable income for financially-focused investors.
