Seeking Alpha
Profile| Send Message|
( followers)  

As an ex-shareholder (I am too afraid of Europe at the moment) of Ford Motor (F) it was nice to see Ford have the confidence to finally announce a dividend of five cents a share, amounting to about a 2% dividend yield. This was announced on December 8, after much speculation by the media and investors. Many expected the dividend to be announced after the Q3 earnings, and when it wasn’t, the stock dropped hard that day. It was a pleasant surprise to investors, who immediately drove the stock up about 3% within minutes. But then something surprising happened. The stock ended the day in the exact same position that it was before the pop.

Now a dividend should add whatever the yearly dividend yield is to that day’s movement. I would argue that a move of only 3% was still very tame in Ford’s case. When Ford reported earnings back in October, the dividend was expected and when nothing was announced, the stock fell 6%. Sure, not all that was attributed to the non-dividend, but I’ll bet a large chunk of it was. In this case of a 2% dividend, Ford should have closed around 5% higher than it would have without the dividend announcement. (The 2% yield plus a 3% boost by the surprise generated by the announcement.) Theoretically, since the stock fell about 2% that day, the stock would have closed down 7% that day without the announcement. I heartily disagree that was destined to happen, considering the movement of the market that day was a drop of around 1.5%.

A couple things could have happened here. I could be wrong, and the stock was destined to move 7% that day or the surprise element shouldn’t be included. I could also be right, and people took profits on an already down day. This would imply that those fleeing investors did not believe that Ford was going to be able to sustain this dividend (and earn the 2% ‘guaranteed’ return with the dividend). It will reportedly cost Ford about $760M in cash every year, no small amount if Europe goes KABOOM and we have a nice little downturn on our hands. If investors do not believe that Ford would be able to sustain this dividend, then current investors should watch out.

Source: Did The Market Screw Up Ford's Dividend Announcement?