S&P Upgrade of Ford Signals Dividend Is Closer (F, GM)

Ford Motor Co. (NYSE: F) may not yet quite be investment grade, but the company is getting closer and closer.  Friday morning brought the news that Standard & Poor’s has raised the debt and credit ratings of Ford.  The new rating is “BB+” and that is now only one notch under “investment grade.”  On top of lowering implied borrowing costs, this could have ramifications for Ford’s dividend policy ahead.

The upgrade is a continued sign of improvement.  unfortunately, we do not expect an imminent move to “BBB-” for the investment grade rating because S&P said the rating is also “Outlook Stable” rather than positive.  It was just on September 29, 2011 when Ford was put on a “Positive” outlook, but the jump went from “BB-” to “BB+” for a solid jump.

S&P did raise Ford’s counterparty credit rating on FCE Bank PLC, Ford Credit’s European bank, to ‘BBB-‘ from ‘BB’ to maintain a better differential than the auto company itself.  That is now “investment grade” for that unit.

Issues cited for the upgrade are the new four-year UAW labor contract acting as a catalyst for
continued profitability and cash generation.

S&P is looking for mid-single-digit EBIT margins or higher.  More importantly, S&P is calling for auto operating cash flows to be $5 billion or more this year.  The base case calls for an improvement in the North America light-vehicle segment sales into 2012.  S&P even sees good prospects for at least $2 billion in automotive operating cash flow for 2012.

Alan Mulally did a phenomenal job of getting Ford’s books in better order and he did not have to take a bailout like General Motors Corp. (NYSE: GM) or like Chrysler.

So, this brings up one close instance to consider.  Ford has discussed the initiation of a shareholder dividend ahead as its credit ratings improve.  We won’t look for that immediately, but Ford is now closer to paying a dividend than it was just yesterday.

JON C. OGG