Ford: How Safe Is The Dividend?
- Will newly announced steel tariffs derail Ford’s sales?
- Is Ford’s 5.8% dividend sustainable?
- Are trade wars 'good and easy' to win as President Trump tweeted last week?
With a dividend yield around 5.8% (excluding the special dividend), Ford’s (NYSE: F) stock looks very attractive to dividend chasers. However, However, one needs to be careful buying a stock just for its dividend. For example, if you bought and held Ford from 2002 until now, you would have nothing but the dividend to show for the holding period. If, however, you bought in 1998, you would be approximately 50% underwater in the stock.
Car manufacturers are cyclical – profits are generally great in good times, and poor during times of recession. Losses, due to a large drop in sales, can lead a company to cut their dividend especially when the yield is significantly above market.
Sales & Earnings Overview
As I mentioned in a previous article, Ford posted positive sales growth 2017 October-December, while GM saw consistent year-over-year (YoY) declines. Ford's revenue was $38.5 billion compared to GM of $37.7 billion.
Ford had a mixed 2017 4Q. Revenue was $41.3 billion, which rose 6.7% YOY which beat analyst expectations by $4.3 billion. 4Q2017 EPS was $0.39, a $0.03 miss versus analyst expectations.
GM also had strong quarterly earnings. Revenue of $37.7 billion, fell 5% YOY. Adjusted 4Q2017 EPS was $1.65, $0.27 ahead of estimates. This set up GM with the best-ever fourth quarter in adjusted earnings before interest and taxes - $3.1 billion, a rate up 18.7 percent from last year.
What is a tariff?
Simply, a tariff is a tax on imports between sovereign states. Trump made the surprise announcement on Thursday that he wants a 25% tariff on imported steel and a 10% tariff for aluminum. Trump wants to increase U.S. production of these metals to combat, what he sees as, unfair trade practices.
While some would argue that there is a time and place for tariffs, in general, they have unattended consequences of slowing down the economy, injuring international trade relations, and causing consumer prices to go up as competition decreases coupled with rising feed stocks.
According to the American International Automobile Dealers Association (AIADA), whose primary role is to advocate for free trade, stated that
Both metals are crucial to the production of cars and trucks sold in America today and would raise the sale prices of those vehicles substantially. In addition to paying more for their vehicles, American consumers and workers can also expect to bear the brunt of the retaliatory tariffs other countries will almost certainly place on goods manufactured and exported from the United States.
The AIADA also stated that with auto sales flattening, this was the worse time for steel and aluminum tariffs to be implemented.
Commerce Secretary Wilbur Ross stated that these tariffs will hurt foreign countries more than they will hurt the U.S. Ross said that
We have unilaterally given away all kinds of concessions since the end of World War II. In the beginning that was probably good policy … concessions that were perfectly reasonable to make to Germany in 1945 or China in 1945 don’t make sense anymore. Those are very strong, mature economies and there’s a lot of history to be undone.
Fortunately for Ford, they buy the vast majority of its steel and aluminum for U.S. production in the U.S. Comparatively, 90% of General Motor’s (NYSE: GM) steel is sourced from the United States.
However, we don’t have to go back too far in history to look at the last time steel tariffs were tired - an analysis of tariffs on steel imposed in 2002 found that the Bush steel tariffs cost 200,000 jobs, including 30,000 in Michigan, Ohio, and Pennsylvania alone.
Is Ford's dividend at risk?
Ford’s key dividend stats are as follows:
Thanks to the recent sell off, Ford’s dividend yield is soaring. As a side note, Ford’s price-to-earnings (P/E) ratio is a relatively modest 5.47; however, its generally in line where Ford’s P/E rides.
Both of these might signal an entry point in Ford and a yield grab. However, the bigger issue is if Ford will cut the dividend. While the special dividend is cash to the investor, it is not something the investor can count on each year even every other year. Accordingly, it is not part of my analysis.
Fortunately, Ford has a large cash balance which potentially could be used to continue to pay the dividend even in lean sales periods. Time will tell.
We have not seen Ford closing prices this low since 2012. A key support of 11 was pierced and Ford is currently trading near its 52-week low at 10.19 reached on March 2, 2018. The stock is trading below its 20-day and 50-day moving averages of 10.68 and 11.67, respectively. Technically, there appears to be an indication of a short term rebound towards resistance at 11.30. If 11.30 is pierced, then a rebound towards 12 might be seen. However, given the tariff news, this upward bias could change and Ford could be pushed down from these levels.
Source: Fidelity stock charts
Source: Trading Central
Are trade wars 'good and easy' to win as President Trump tweeted last week?
I don’t like anyone in position of power using Twitter as a form of communication. It’s a great informal tool to stay connected with friends - other than that, please don’t tweet. There, I said it. I’m showing my age. The challenge with using just a few characters to explain international trade policy is that it is lacking substance, true direction with supportable facts.
If trade wars are good depends on which side of the protected group you stand. Easy? No way.
Adam Smith, 18th century economist and one of most influential thinkers in economics, wrote Wealth of Nations in 1776. He had great sway in promoting the idea of free trade being a better option than protectionism. His book is a great read – see the link directly above. There is so much more in this book, but a few key points:
- Tariffs are sometimes sold by saying the other country (or countries) are cheating or getting more than they should. The problems with tariffs is that these types of policies can get out of control with each country adding more and more trade restrictions on each other causing overall decline in trade, inefficiency, and overall wealth destruction.
- If a tariff for aluminum and steel, why not for other industries as well. Don’t all U.S. companies deserve protection? (I’m being facetious). The point is the U.S. steel industry will benefit from steel tariffs, but society will pay more for goods with steel in their industrial process. This is especially true if steel can be purchased outside of the U.S.A at a cheaper rate. Protectionist policies favor industries who compete with foreign manufacturers over those industries that do not compete with foreign manufacturers.
Ford's dividend is very tempting and I don't believe there is a risk of Ford cutting its dividend in the short term. However, if earnings come under pressure, the dividend will eventually be cut. Given the overall industry weakness and the uncertainty of the recently announced tariffs, I will continue to pass on Ford. There are other places for dividends without the stock volatility.
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