Ford: We Plan to Sustain Dividends Through a Recession

By Markets Fool.com

Sooner or later, a recession will slow Ford's factories and squeeze its profits. But Ford has a planto sustain its dividend payments when that happens. Image source: Ford Motor Company.

Continue Reading Below

Investors in Ford Motor Company (NYSE: F) have been drawn to the stock by several factors. The Blue Oval's steady profitability, battle-tested management team, strong product line, and careful capital allocation are all good selling points for the stock.

But a lot of those investors will also point to Ford's solid dividend. Ford's dividend yield is hovering right around 4.7%. That's an exceptionally strong level, but it reflects some concern by investors about a potential cyclical decline in the U.S. new-car market -- and the possibility that Ford might cut the dividend if its profits are squeezed.

How likely is that?

What Ford's CFO said about sustaining its dividend

During Ford's annual Investor Day presentation on Wednesday, CFO Bob Shanks addressed investors' concerns about the dividend (emphasis added):

Continue Reading Below

We expect Ford's performance to be strong through 2018 -- with our core business improving, allowing us to invest in the emerging opportunities that will ensure our future success. Our capital allocation continues to be disciplined and to deliver strong returns, and we are fully prepared for a downturn. As a result, we plan to offer a secure regular dividend through the business cycle with an option for upside on investments to keep our core business strong and to win in emerging opportunities.

Bob Shanks, Ford's chief financial officer. Image source: Ford Motor Company.

What does that mean? Ford's recent practice has been to keep its regular quarterly dividend payments steady, while paying a supplemental dividend from time to time as its cash flow allows. Shanks is saying that Ford plans to continue that practice "through the business cycle" -- or put another way, even if the market turns turns down, as long as Ford's cash reserve remains

Why that assurance is important to Ford investors

Autos are a cyclical business: Sales and profits rise and fall with economic cycles. Consumers and businesses buy new cars and trucks when they're feeling good about their near-term economic prospects. When times get tough, those purchases are postponed.

For automakers, that cycle has always been difficult to manage. The challenge is that the business of manufacturing cars has very high fixed costs: Factories and tooling represent huge investments that are amortized over the life of a given product. As production and sales of that product slow, a larger percentage of the revenue it generates is counted as costs, not profits. That squeezes the automaker's bottom line.

Historically, during downturns, the Detroit automakers have seen profits narrow and have often swung to losses. That's why Ford's stock price is lagging (and why its dividend yield is so high right now): In the U.S., Ford's most important market in terms of profits, there are good reasons to believe that the current auto sales cycle has peaked.

That has investors worried. But there's some good news: Unless the next recession is extremely severe, Ford's much-improved cost structure should keep it from posting losses. Even if it does swing to a loss for a few quarters, it has an ample cash reserve (over $20 billion) to sustain its heavy investments in new products until sales recover.

This slide from Ford's Investor Day presentation sums up its thinking about its dividend. Source: Ford Motor Company.

But clearly, either way, Ford's profits will shrink during the next downturn. What Ford is saying now is that it will prioritize its regular dividend payments even when sales and profits fall with the cycle.

Ford joins General Motors in reassuring its dividend-minded investors

Shanks' statement echoed a similar one made in in July by rival General Motors' (NYSE: GM) CFO Chuck Stevens. Stevens said that GM is planning to continue its dividend payments through the next downturn as long as its cash position remains strong.

That's the gist of Shanks' statement as well. While a severe recession could obviously force a change in plans, both are important statements about the Ford's and General Motors' priorities, and both are good news for investors.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends General Motors. 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.