For what felt like an eternity, Ford was a rock-solid dividend stock. With the exception of a blip between 1982 and 1983, Ford stock paid a dividend to shareholders continuously from 1956 to 2006 -- 50 years!
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But just before the onset of the Great Recession, the company was forced to suspend its dividend. Over the next two years, Ford stock plummeted over 80%. There was, however, a silver lining. Ford was the only automaker to make it through the recession relatively unscathed -- forgoing the government bailout that General Motors and Chrysler needed.
Since the nadir in 2008, Ford stock has returned over 1,000%, and it has reinstated its dividend. In fact, in early January, the company increased its payout by a whopping 20%. So is Ford stock -- and its dividend -- safe? Read below to get the view from 30,000 feet.
The most important metric for dividend investors
If you're buying shares of a company primarily for its dividend, there's no metric more important to watch than free cash flow (FCF). This represents the total amount of money a company has put in its pocket during the year, minus any capital expenditures. At the end of the day, it is from FCF that dividends are paid.
Here's a look at what Ford stock's dividend payout has looked like since 2012 -- the first full fiscal year its dividend was reinstated.
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The most important takeaway here is that Ford's dividend has very good coverage. Over the past year, only 34% of the company's FCF has been used to pay out its dividend. Even if FCF stayed exactly the same (which it probably won't), the recent 20% bump still leaves a lot of breathing room.
This tells us two things. First, if tough economic times hit or if Ford's business falters a bit, the company should be able to maintain some type of payout. And more importantly, since the payout ratio is still low, there's room for growth to continue.
But what about Ford stock?
Investing in automakers can be a tricky proposition, especially for the beginning investor. That's because the industry is largely cyclical -- meaning there are times where car sales will boom, followed by much weaker demand -- and companies can therefore be difficult to value.
In addition, companies like Ford have high fixed costs in the way of pension plans. Though the plans are less of an issue today than they were five years ago, they still represent a hefty cost for Ford.
But if we are solely focusing on the future of Ford's cars, the future seems to be cautiously optimistic. The company's new F-150 model holds a lot of potential in North America -- the region that contributes the most to the company's revenue.
Abroad, the company has been hampered by problems that are out of its control -- like stagnant economies and the devaluation of the Venezualan Bolivar, and by some self-inflicted wounds -- particularly a recently costly recall.
Overall, however, these problems won't stay around forever. As it is, Ford stock is trading for just 13 times earnings and offering a 4% dividend yield -- both tempting numbers for long-term investors who believe the company will continue dominating market share domestically while expanding abroad.
The article How Safe Is Ford Motor Company Stock and Its Dividend? originally appeared on Fool.com.
Brian Stoffelactually drives a Toyota, so even though he thinks Ford's stock looks appealing right now, he's not a customer. He has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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