Wednesday, August 28, 2024

A Rough Road Ahead for This Automaker's Dividend?

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AN OXFORD CLUB PUBLICATION

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Does Ford's Dividend Have a Rough Road Ahead?

John Oravec, Research Analyst, The Oxford Club

John Oravec

Ford's (NYSE: F) vehicles may be "built to last" and "built Ford tough"... but is the company's dividend in jeopardy?

It's been a rough road for Ford shareholders. The American automotive giant is still trying to recover from mistakes that plagued it in 2022 - particularly in supply chain and production stability.

The stock now trades for less than half of what it did in January 2022. Since then, it's suffered from one bad earnings report after another.

The company's most recent report on July 24 was particularly brutal. Ford's second quarter earnings per share came in more than 30% below Wall Street's expectations. Shareholders dumped the stock and wiped out more than 18% of Ford's market cap in just one day.

Chart: Ford Stock Has Been Leaking Oil
View larger image
 

Ford pays a $0.15 per share quarterly dividend, which equates to a 5.4% yield at current prices. But after seeing the disappointing second quarter results, investors were left wondering whether the dividend is safe or in danger of being cut.

Today, I'm stepping in to give you that answer.

Let's crunch some numbers.

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While 2022 was a difficult year for the company, the last two years have been surprisingly good given the circumstances.

After Ford reported -$13 million in free cash flow in 2022, its supply chain issues eased up last year, and its free cash flow jumped back up to $6.7 billion. On top of that, forward estimates predict that free cash flow will increase by an additional 4.6% this year.

Unfortunately, Ford's free cash flow remains well below its 2020 figure of $18.5 billion, so we'll have to knock the stock's dividend safety rating down a peg.

Chart: Ford's Troubling Cash Flow Trend
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Next, let's look at how much the company is paying out in dividends.

As a reminder, the dividend payout ratio tells us what percentage of a company's cash flow it is returning to shareholders.

Our golden number is 75% or below.

Ford snuck just under that benchmark at 74.8% in 2023...

But 2024's estimate is significantly lower at 34.8%.

The company paid a special dividend in both years, but neither payout ratio crossed our threshold, so there is no reason to worry.

Finally, we have to examine Ford's dividend history to see how often it has raised or cut its payout over the past 10 years.

Is its track record strong enough to overcome its stagnant cash flow?

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