How Safe Is Ford's Dividend?

Cars and Drivers

Published: July 13, 2022 7:30 am

Ford Motor Co. (NYSE: F) has been one of the car company stars of the past year. Unit sales at Ford have generally outperformed expectations and been better than the balance of the industry. Some models, particularly the new F-150 Lightning electric vehicle (EV), are expected to be nothing short of home runs.

Ford, however, faces two substantial hurdles. One is the cost of going electric. Ford’s most recent estimate for its push into the EV business is $50 billion. According to Reuters, this is what the company believes it needs to make Ford an EV leader, and it will be invested through 2026. Even for a company of Ford’s size, that is remarkably expensive.

Ford also will face the challenge of a recession. Usually, new car sales tumble in an economic downturn. The average age of an American car on the road is 12 years. If the economy turns bad, many people will try to stretch that. Ford EV investment will walk into the jaws of a downshift in GDP growth.

Perhaps these two reasons have been the cause of a 45% drop in Ford’s stock this year.

Ford can brag that it was able to reinstate its dividend as a sign of financial health. Today, it is $0.40 per share, which delivers a yield of 3.54%. Typically, high earnings allow companies to lift dividends, or they can dip into their cash reserves.

Ford announced in October the return of its dividend. It was cut, to some extent, because of the COVID-19 pandemic. Bloomberg took the view that it was reinstated because the Ford family counts on the money to live well — very well in some cases.

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Dividend cuts because of diseases are rare, perhaps rare enough not to have happened in the past century. A tough economy is nearly always the cause. The tough economy already has started.

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