Restoring Ford's Dividend Is Tricky, Could Follow Resumption At GM

Summary

• Ford Motor Co.’s recent third quarter results and the promotion of Jim Farley to CEO have underscored the question of when the automaker’s dividend will be restored.
• Farley signaled that capital outlays to finance migration to electrification are significant, reflected in the rollout of the Mustang Mach-E in North America and introduction of the E-Transit.
• Farley declined to discuss dividend resumption with analysts, postponing the subject until the spring. If Ford’s financial performance is decent through March, the automaker could distribute a token amount.
• Several positive factors potentially bear on cash flow. But investors should be prepared for a dividend drought of unknown duration, as capital pressures and economic weakness could be substantial.
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Ford Motor Company’s (NYSE:F) solid third quarter earnings report has raised hopes among investors that the automaker is back on track, beating analyst estimates, after a calamitous pandemic-induced shutdown during the second quarter that produced a pre-tax quarterly loss of $1.9 billion.

Automotive revenue and adjusted earnings per share in the third quarter were well ahead of expectations, as pent-up demand for vehicles spurred retail sales by dealers who were ordering every vehicle that Ford factories could manufacture. Strong demand meant that Ford was able to keep retail financial incentives in check, thus strengthening net pricing.

Ford is in the midst of a multi-year turnaround, the point of which is to reduce warranty costs, increase market share and make its operations – especially vehicle development and manufacturing – more efficient and competitive.

Ford Share Prices Battered by Pandemic

Ford share prices – battered during the first weeks of the pandemic – are up 65% over the past six months, despite no clear signals when the suspended dividend would be resumed. Asked about the dividend during the third quarter call with analysts, newly-promoted CEO Jim Farley dodged the question.

Ford CEO Jim Farley

Source: Ford Motor Co.

“I don't think this is the time to have that discussion,” Farley said. “I think we need to have that framed up in our total capital strategy and calls on capital and where we're headed as a business and I think next spring would be the time to do that.”

Farley noted in his Oct. 29 earnings call with analysts that demands on capital for electrifying Ford models such as the Mustang Mach-E, a new commercial van and, eventually, the F150 pickup are substantial.

He noted that Ford is in the “first inning” of electrification and well along preparing for the next stage of development.

“We don't want to just be one of the many automakers to transition to electric,” he said. “We want to lead the electric change. That's why we're committed to Paris. That's why we're standing with California and that's our capital and we feel that the way we're doing it at Ford is the most important message, which is commercial and work.”

2021 Ford F150 pickup

Source: Ford Motor Co.

Ford’s new F150 pickup is beginning to rollout of its two assembly operations in Dearborn, Michigan and in Kansas City. The new model, which features an all-new design and the latest generation of the Sync infotainment system, is quite handsome to my eyes and has won strong reviews from professional critics. Among the available powertrains in the new pickup is a gas-electric hybrid, the first among fullsize pickups. According to early tests, the 4X4 gas-electric setup will deliver little or no difference in mileage ratings from Ford’s 4X4 3.0-liter V6 turbodiesel – an average combined city/highway rating of 24 miles per gallon.

Ford Pickup Is Its Cash Cow

Ford’s pickup truck is responsible for the bulk, if not entirety, of the automaker’s profit – so the success of the new model is crucial. The fourth quarter earnings results, expected in early February, should be weak, reflecting the slow production ramp-up of the new F150. Some estimates see F150 production at about 100,000 trucks fewer than a normal quarter’s total, contributing to a $500 million quarterly loss. A smaller or much smaller loss than expected would be good news and possibly push the stock price higher.

Since sedans are being phased out of Ford’s product offering due to changing consumer tastes, the company will try to compensate in part with a new E-Transit battery-powered commercial van. Farley has said that the van and related data and connectivity features for commercial users will be a key growth area – an initiative that is part of Ford’s overall $11.5 billion investment in EVs. Pricing for the new model will start at around $45,000 when it’s available in later 2021.

As CNBC explains: The E-Transit is expected to arrive late next year. It’s expected to be part of a new segment of all-electric work vans used for deliveries, maintenance and other services by Amazon (AMZN), United Parcel Service (UPS) and other businesses that want to switch their vehicle fleets from gasoline or diesel to electric.

2021 Ford E-transit van

Source: Ford Motor Co.

Ford will find the competition stiff in the delivery van space. In addition to traditional rivals for van sales like General Motors Co. (GM) and Daimler AG's (DMLRY) Mercedes-Benz, newcomers like Rivian and Workhorse (WKHS) could pose competition.

Also picking up slack from the loss of sedan sales will be Ford’s Bronco initiative, reviving a brand that is aimed straight at the heart of Fiat Chrysler Automobiles N.V.’s (FCAU) Jeep franchise. Bronco Sport, a rugged iteration of the same architecture that supports Ford’s Escape crossover, is expected in showrooms by the end of this year.

A New Franchise For Ford?

Bronco all-terrain models, built on a light-truck architecture that supports Ford’s Ranger, are scheduled to arrive in this spring. No doubt other versions of Bronco are being planned, since Ford is striving to create with Bronco an entire franchise within the Ford brand, much the same as Jeep has become.

Additionally, Ford will begin delivering its battery-powered Mustang Mach-E, which starts at $44,000, within the next couple of months. Mach-E is a crossover whose market likely will be limited, though the new model will use a new architecture that can be adapted to other models if consumer demand for battery-powered vehicles increases from its current low level.

2021 Ford Bronco

Source: Ford Motor Co.

If Ford is to be successful in its quest to be more “fit” as a reliable and consistent generator of profit, the F150 has to do well, Bronco has to grow as a franchise and the automaker’s investment in battery technology must prove prudent – in other words, enough to meet market and regulatory demands and not too much in light of the danger that EV profits aren’t likely to materialize soon.

Ford's Lincoln luxury franchise is in a costly multi-year brand renovation that is likely to be a drag on earnings.

The decision to restore Ford’s dividend as early as this spring could be hastened by a hint given during General Motors Co.'s Q3 earnings call. Mary Barra, CEO, raised the possibility of restoring GM’s dividend.

"If our current recovery continues," Barra said. "We anticipate reinstating a dividend at the appropriate level that balances various capital allocation priorities, including our investments to accelerate EV. We know this is a high priority for our shareholders, and we're looking at timing around mid-2021."

Ford and GM, crosstown rivals, watch one another carefully and often imitate one another’s tactics and strategies. Once GM suggests it “might” restore the dividend by mid-2021, the likelihood of it happening increases – and once GM goes, Ford is more likely to follow.

Assuming all this unfolds, Ford’s current stock price likely would rise because I don’t believe that assumption is currently built-in. Still, given all the economic and public health uncertainties, I remain neutral on Ford shares.

Disclosure: I/we 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.