Why Did The Market Reject Ford's Special Dividend?

| About: Ford Motor (F)

Summary

Ford provided investors a peek into its solid 2015 results.

Those figures were accompanied by forecasts of slight improvement in 2016 and a special $0.25/share dividend.

Shares were sharply down in after-market trading despite seemingly good news.

After the market closed on Tuesday, Ford (NYSE:F) announced a special dividend of $0.25/share in addition to its initially scheduled $0.15/share. Also included in this announcement was ample information about the company's 2015 performance as well as 2016 guidance. Shares were trading down as much as 3.5% in after-market action. The press release showed that Ford's domestic sales increased 5% and were the highest they have been since 2006. The numbers reported were generally pleasing to investors, including operating profit in the upper half of the guided range ($10B-$11B) and the 39th straight year of U.S. dominance for the F-Series. For 2016, investors should be satisfied with the projections provided by management. Operating profit is "expected to be equal to or higher than 2015," as is the case with automotive revenue and operating margin. There was also good news with regard to Ford's operating regions with Europe, Middle East & Africa, and Asia Pacific is expected to improve and be profitable next year as North America thrives once more. This is a major step for Ford in my opinion as it points to the company finally becoming stable across the globe, with the exception of South America.

The part of the announcement that has investors talking is the supplemental dividend, bringing the total quarterly payout on March 1st to $0.40/share, approximately a 3.2% yield. On the surface, this is great news following good news. Especially since the supplemental dividend will only be an additional $1 billion out of F's pockets in the form of dividends for the quarter. At the end of Q3 2015, the company had roughly $14.7 billion in cash, so the special dividend brings up no liquidity concerns. The problem here is "why is Ford doing this?" The obvious answer (that the market is seemingly assuming) is Ford has nothing better to with the cash and therefore is throwing it at shareholders to make up for its lackluster performance of the last few years. It hints that F is starved for growth and needs to please investors somehow. The large buyback program and yield (excluding special dividend) serve as points to support this thesis. As an owner of Ford, it was also the first thought I had. As I pondered the move and management's motives, I came to realize that this is not necessarily true.

Has anyone considered that maybe the company has nothing better to do with that cash in 2016? Including the special dividend, Ford will be outlaying only 10.9% of its cash hoard in dividends this quarter. Given that the Blue Oval generated $4.63 billion in free cash flow last quarter alone, I think it's fair to say there is some disposable income available. That FCF is not the result of stagnant corporate action, however, which is why I don't believe it should be viewed as a red flag. The company has been very aggressive with new product rollouts worldwide. Speaking of the rollouts, on the Q3 conference call, CEO Mark Fields reminded investors that the firm successfully introduced 24 new vehicles in 2014 and had completed 14 of 16 product debuts in 2015. There are 12 more vehicles slated to be brought to the market next year as well.

On top of that, Ford has been very proactive in its investments with regard to electric vehicles and now autonomous vehicles. Much has been made of the partnership F struck with tech giant Google (NASDAQ:GOOG) to build driverless vehicles. There was much speculation about which automaker Google would collaborate with, and has not been greeted by the market with the enthusiasm it should be. Shares of Ford stock are actually down about 7% since the announcement. An underappreciated aspect of the agreement is that the joint-venture will be legally separate from Ford, shielding it from any liability that could arise while testing the new technology. This is an investment for the future that will benefit both Ford and Google as autonomous vehicles are widely regarded as the future of vehicular travel. Fields himself has publicly stated that fully autonomous vehicles will be available in the marketplace by 2020, and the Institute of Electrical and Electronics Engineers believes that 75% of all vehicles will be autonomous by 2040.

Oh and don't forget about the massive transformation of the F-150. It was a rocky transition early in the year, but consumers were pleased with the changes as the F-150 topped Car and Driver's list of full-size pickup trucks. Despite supply constraints in the first quarter, the F-Series still sold over 85,000 vehicles for the first time in 10 years. With U.S. vehicle sales expected to set an all-time record in 2016, it's very likely that F-Series sales surpass the 85,000 unit mark by a much larger margin this time. So what else is Ford supposed to do with its cash? The company is expanding worldwide, introducing a litany of new vehicles, and innovating in multiple ways to tailor its products for the coming decades. I believe much of the negative reaction from the market is due to the panic-ridden stock market environment that has been present for much of 2015. Ford issued this special dividend as a treat for investors, and it should be interpreted that way. The company is investing billions in capital expenditures while providing strong shareholder returns with more than enough cash flow to support both initiatives. The special dividend is merely due to Ford's excess cash on hand and overshadows what is an attractive investment opportunity.

Disclosure: I am/we are long F.

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.