Last week, Ford (NYSE:F) announced that it would double it dividend from 5 cents a quarter to 10 cents. The company will be paying 40 cents a year, which equates to about a 2.8% yield based on the current market price.
Its hard to believe that it's been only a year since Ford reinstated its dividend. Ford's management seems to be keen on returning profits back to its loyal shareholders. The company saw its best December sales since 2006. Sales rose 1.9% to more than 214k vehicles.
The company has grown its liquidity position by more than $2 billion in 2012. Dividend growth investors are looking at an incredible opportunity given Ford's story here. Ford is growing its revenue stream significantly. The company has increased its liquidity position to a very strong level. So the real question is, just how much can Ford grow its current dividend?
When we look at dividend paying stocks, we always want to understand its payout ratio. This ratio is simply the percentage of its earnings its paying out in dividends. If the company maintains a sufficient enough coverage to meet its dividend payments and more importantly cover everyday operations, there is plenty of room for an increase in distributions.
With the new distribution, Ford will have a payout ratio of 27% based on its FY 2013 earnings estimate of a $1.46. This is fairly reasonable payout ratio and assuming the ratio stays the same, the dividend will still increase at a nice pace.
Ford is expected to grow 7.45% annually for the next five years. I believe the company will do fine going forward. Management is already trying to address its biggest problem, which is the company's exposure to Europe. Its plan to overhaul operations in the region will take time, but will help cut its losses.
Assuming future growth estimates and a payout ratio of 27%, the company is likely to pay 60 cents a share. However, if Ford is able to stabilize operations and cut down on losses, it might be able to increase its payout ratio at a level closer to blue-chip companies.
There is plenty of room for growth on Ford's dividend just based on the company's earnings potential. In addition to this, management is making it clear that investors deserve distributions. I believe Ford is a fantastic opportunity for dividend growth investors.