Ford ends 5-year dividend drought with 5-cent payout
Published : Dec 9, 2011 - 18:52
Updated : Dec 9, 2011 - 18:52
Ford Motor Co., the second-largest U.S. automaker, declared Thursday a 5-cent quarterly dividend, its first payout to shareholders since September 2006.
The move comes after Ford earned $1.65 billion in the three months ended in September, its 10th consecutive profitable quarter, and negotiated a new four-year contract with the United Auto Workers covering its 40,600 U.S. hourly workers. The dividend will be paid March 1 to shareholders of record on Jan. 31, the Dearborn, Michigan-based automaker said in a statement.

“The board believes it is important to share the benefits of our improved financial performance with our shareholders,” Executive Chairman Bill Ford said in the statement. “It is an important sign of our progress in building a profitably growing company and our confidence in the future.”

Chief Executive Officer Alan Mulally revived Ford by focusing on quality and fuel economy in new models such as the Fiesta subcompact and redesigned Explorer sport-utility vehicle. Ford earned $9.28 billion in the past two years after losing $30.1 billion from 2006 through 2008 as a collapse in SUV sales was followed by the worst recession since the Great Depression.

Ford slipped 3 percent to $10.75 at the close in New York. The shares tumbled 36 percent this year after rising 68 percent in 2010.

The payout will cost Ford about $200 million a quarter, Chief Financial Officer Lewis Booth said in a conference call today. The automaker hopes to avoid cutting the dividend if the economy turns down, as it has in the past, Booth said.

“Compared to the past, we’ve substantially restructured the company; our break-even is lower than it was,” he said. “We would expect this to be a sustainable dividend.”

If the automaker’s financial results keep improving, “we’ll continue to look to see if we can increase the dividend,” Booth said.

Bloomberg analysts predicted in July 2010 that a 5-cent quarterly dividend would resume as soon as 2012. The Bloomberg dividend estimates are based on seven criteria, including a company’s guidance, dividend history, regression analysis and put-call parity.

The dividend may increase to 10 cents quarterly in a year, the analysts estimate.

“A dividend is definitely a catalyst,” said Brian Johnson, a Chicago-based analyst at Barclays Capital who rates Ford “overweight.”

“This is putting Ford back on the radar screen of portfolio managers.”

Recovering an investment-grade credit rating will also attract investors, Johnson said.

“I think the investment rating agencies are not going to view this as inconsistent with our track back to investment grade,” Booth said.

Standard & Poor’s raised Ford’s credit rating two levels to BB+, the highest non-investment grade, on Oct. 21, saying the new contract will not impede profitability or cash generation.

“We don’t see a big chance of an upgrade in the next year,” Robert Schulz, a New York-based analyst for S&P, said today in a phone interview.

“The prospects for cash-flow generation outside of North America are probably looking weaker.”

Fitch Ratings upgraded Ford to BB+ from BB on Oct. 20, and assigned a positive outlook.

Moody’s comment

Moody’s Investors Service raised Ford’s corporate rating to Ba1, one step below investment grade, on Oct. 27 and said the new UAW contract reinforces the automaker’s “strong position in North America.” Moody’s said then Ford was likely to restore a dividend and still assigned the automaker a “positive outlook.”

“This dividend is consistent with what we expected,” Bruce Clark, a New York-based analyst for Moody’s Investors Service, said today in a phone interview.

“In terms of having any real impact on the likelihood or time frame of getting to investment grade, it’s really not going to be a driver,” he said. “The big drivers are executing their existing operating plan, maintaining strong liquidity and balance sheet and addressing challenges in Europe.”

Ford had said it wouldn’t pay a dividend until it returned to investment-grade ratings. That position changed in October.

“Our shareholders have been very patient,” Booth said Oct. 20 on a conference call about the labor agreement.

Begs the question

That change in strategy and the cost of the dividend may delay Ford’s return to investment grade, said Jody Lurie, a credit analyst at Janney Montgomery Scott LLC in Philadelphia.

“The fact that Ford changed its plans last quarter begs the question as to how quickly it will achieve its investment- grade rating,” Lurie said today in an e-mail. “The jump from high yield to investment grade is a big one, and the company needs to prove to the agencies that it has bondholders’ best interest in mind.”

S&P and Moody’s assigned Ford a non-investment grade rating in 2005.

The Ford family, which has 40 percent voting power through a special class of stock known as Class B, didn’t influence reinstatement of the dividend, Booth said.

“This was a management decision and recommendation to the board that the board approved,” Booth said. “It wasn’t linked to any particular part of our shareholders.”