Ford's Dividend Increase

Jan.10.14 | About: Ford Motor (F)

Ford (NYSE:F) has just announced its 2nd consecutive annual dividend increase since re-initiating the dividend in 2012. Here are a few quick highlights from the announcement:

  • The new quarterly dividend per share is 12.5 cents per share.
  • This is up 25% from the previous level of 10 cents per share.
  • The new dividend will be paid to shareholders on record as on 01/31/2014.

This article was written three months ago debating whether Ford would announce a dividend increase in 2014. With that question being answered emphatically by Ford, this present article evaluates how the dividend basics look for Ford post the increase and what to expect in the near future. Let us get into the details.

New Yield: The new annual dividend per share of 50 cents pushes Ford's current yield above the 3% mark that a lot of investors look for. As a comparison, Toyota Motors (NYSE:TM) yields 2.1% and it is no secret that General Motors (NYSE:GM) does not pay a dividend yet, although that could change soon according to a recent announcement by General Motors.

Payout Ratio: The new dividend puts the trailing payout ratio at about 35%, which is a comfortable number generally speaking. The average forward earnings per share estimate for 2014 stands at $1.50, which puts the forward payout ratio at 33%. Toyota Motors trumps Ford here with a payout ratio in the early 20s.

Dividend Growth Rate: Dividend Growth Investors might find it blasphemous to even talking about a "dividend growth" rate for Ford. And rightly so as the company wasn't a dividend growth stock between 2002 and 2012. But that changed in 2013 and has continued in 2014 as well. The chart below shows the increasing dividend and yield over the past two years. Here are the 3 quick highlights for this section:

  • The two dividend increases have been by 100% and 25% for the past two years.
  • Obviously, this is not going to continue at the same pace but the fact that the management has kept its word about increasing dividends along with earnings.
  • The stock has a long way to go (At least 3 more years of dividend increases) to get the attention of most dividend growth investors.

Click to enlarge

(Source: YCharts.Com)

Cash and Free Cash Strength: As covered in the article we did in November, Ford's cash strength is remarkable. The points below should convince investors about Ford's ability to cover and increase dividends:

  • According to Finance.Yahoo.Com, cash on hand equals $26 Billion, which represents 42% of the company's total valuation.
  • The average quarterly free cash flow over the past 5 year stands at $1.75 Billion.
  • The company's current commitment to shareholders is 12.5 cents per share per quarter.
  • The total outstanding shares as of this writing is about 3.9 Billion.
  • Multiplying the outstanding shares by the quarterly dividend amount (3.9 times .125) gives us a number around 500 Million.
  • In other words, the free cash flow (based on 5 year average) is more than sufficient to cover the current dividend commitment to shareholders, leaving substantial cash for operations.

Extrapolation: Our past articles (like this one) have presented the extrapolation section in a different way than what you are about to see here. With companies that have a reasonable length of dividend growth streaks, it is much safer to frame an assumption of future increases. But given Ford's history of eliminating dividends and a not so lengthy dividend increase streak, let us try a different approach.

Taken with a pinch of salt, Analyst estimates can be an useful numbers to plug and play.

  • Ford's earnings per share is expected to grow at 12% per year over the next 5 years.
  • The EPS column below shows a 10% annual increase in earnings per share.
  • The next 3 columns show the expected dividend per share if Ford decides to pay out 35% to 50% of its earnings to shareholders as dividends.
  • For any company, earnings are critical to determine the future dividends reasonably. It is more so for Ford, which has publicly declared that it plans to grow dividends only in line with earnings so that it doesn't have to eliminate dividends like it did in 2007.
  • The last column shows the expected yield on cost (should these scenarios hold true) for an investor who buys the stock at about $16 (current price).

Click to enlarge

Conclusion: This dividend increase is definitely a sign that the company liked what it did in 2013 and is liking its prospects for 2014 as well. If you are looking to add a turnaround company, Ford is a good pick with

  • an enviable cash strength
  • a reasonable valuation
  • a yield much higher than S&P's
  • a potential for dividend growth

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.