Ford in fight with Wall Street over dividend
Wall Street says Ford Motor Co. must cut its dividend. The automaker says that’s nonsense.
The debate erupting over Ford’s quarterly payout to shareholders – including the founding family that derives millions from the disbursements – is exposing a growing and contentious divide over what needs to be done to fix the ailing automaker.
Analysts at Morgan Stanley and Berenberg say Ford can no longer afford to pay the 15-cent dividend – the most generous among its automotive peers – as earnings evaporate overseas and the company initiates an $11 billion restructuring that it’s said will take as much as five years.
Ford Chief Financial Officer Bob Shanks responds that the carmaker has enough cash and income to cover the dividend, even in a downturn, in large part thanks to its healthy credit unit.
“The regular dividend is not at risk, and all those commentaries coming after the quarterly call – while I can understand the sentiment – are all baseless,” Shanks said in an interview. “We’re very comfortable with our strategy on the dividend.”
The founding Ford family has a bit of skin in this game, of course. The dividend provides at least $42.5 million in annual income to owners of the Class B stock that only the progeny of Henry Ford can hold, which give them 40 percent voting control over the company.
The payout to the family is much higher when holdings of regular common stock are factored in. Executive Chairman Bill Ford, 61, and his cousin Edsel Ford II, 69, hold a total of nearly 7 million shares. As board members, only those two are required to disclose their common holdings.
When speaking on behalf of the family during the company’s annual meeting last year, Bill Ford told shareholders that “most of our net worth is tied up in the company.” At this year’s meeting in May, Bill Ford joked about the importance of the dividend to his family while reading a question from an investor.
“Why is the company so stingy with paying dividends?” Bill Ford read during the webcast meeting. He quipped: “Was that sent in by a member of the Ford family?”
Ford last reduced its dividend in July 2006 and then suspended it two months later, as truck and sport utility vehicle sales were collapsing amid rising gasoline prices. The company resumed the dividend in 2012 in the wake of being the only Detroit automaker to make it through the global recession without resorting to a government-backed bankruptcy.
At 6.3 percent, Ford’s dividend yield ranks as the fifth highest in the S&P 500 Index, according to data compiled by Bloomberg. The payout amounts to $2.4 billion annually.
Now, the company is hoping to buck history and maintain the disbursement even during bad times. Ford seems to be in the thick of them already: Profit nearly fell by half in the second quarter as the automaker lost money in China, South America and Europe.
“This year will be the trough for us,” Shanks said. Updated vehicles arriving over the next two years “will start to turn the tide in improving our results.”
Analysts caution Ford may be living beyond its means. The company’s cash flow no longer covers the quarterly dividend, Berenberg analyst Alexander Haissl noted in an Aug. 6 report.
Ford’s dividend is “looking extremely fragile as cash flow from the core business continues to deteriorate at a rapid pace,” wrote Haissl, who rates Ford a sell and has an $7 price target on the stock.
Bloomberg Dividend Forecasts analysts project that the automaker will cut its quarterly payout to 11 cents, while Morgan Stanley foresees the dividend being slashed in half by next year.
Morgan Stanley’s Adam Jonas, who rates Ford the equivalent of a buy, contends the automaker needs to retain cash to strengthen its balance sheet as it prepares to spend on its restructuring. The fact that management insists they won’t do that means Ford may be willing to pay the dividend even if the company burns cash, Jonas wrote in a July 31 report.
Ford intends to defend the dividend with its more than $25 billion cash pile, Shanks said. Including borrowings, it has access to more than $36 billion in liquidity.
Shanks said that making the dividend sacrosanct will finally boost Ford’s long-struggling stock. The shares are off 24 percent this year, more than twice percentage decline at rivals General Motors Co. and Fiat Chrysler Automobiles NV. The stock has fallen to an almost six-year low in the wake of the company cutting its profit forecast for the year late last month.
The tension between the investment community and the company was laid bare on Ford’s second-quarter earnings call. Morgan Stanley’s Jonas criticized Chief Executive Officer Jim Hackett for postponing an investor meeting that had been slated for September and question if the 63-year-old executive’s job was at risk. Hackett assured him it wasn’t.
Shanks, in the interview, said the company isn’t going to share information about the restructuring until it’s ready.
“We’ll do it as it unfolds and as it occurs because of the complexities of dealing with all the constituencies involved,” he said.