Investor sentiment has soured on U.S. automakers this year; General Motors (GM) shares are down 18% year to date; Fiat Chrysler (FCAU) shares are down 15%, while sentiment has soured most on Ford Motor Co. (F), with its shares down 25% in 2018, observes Steve Mauzy, editor of High Yield Wealth.
Ford had a rough second quarter. Ford missed analysts’ earnings estimates when it posted $0.27 per share. Management went on to guide for lower full-year earnings. Management expects Ford to earn $1.30-to-$1.50 per share. Management expected Ford to earn $1.70 at the start of the year.
Ford has problems in China, an important growth market. Ford sales in China fell 25% in the first half of the year. To add insult to injury, Beijing’s retaliatory tariffs on U.S. imports will cost Ford $200 million to $300 million this year.
Management also recently announced $11 billion in “restructuring” costs. Ford expects to write off the amount over the next three to five years. The restructuring relates to Ford changing its auto portfolio. Analysts now openly question Ford’s $0.60-per-share annual dividend. Is it sustainable?
Bloomberg’s Dividend Forecasts, a survey of analysts, says that the Ford will cut its dividend by 25% this year. Morgan Stanley foresees a more dire situation. It sees the dividend being cut in half by next year.
Ford Chief Financial Officer Bob Shanks begs to differ. He says that Ford has the cash and income to cover the dividend, even if the market turns for the worst. Shanks cited Ford’s healthy credit unit, a reliable money maker.
Here’s what Shanks had to say about the dividend: “The regular dividend is not at risk, and all those commentaries coming after the quarterly call — while I can understand the sentiment — are all baseless. We’re very comfortable with our strategy on the dividend.”
Ford intends to defend the dividend with it $25 billion cash pile, Shanks said. Including borrowings, Ford has access to more than $36 billion in liquidity. We’re sure the Ford family supports the dividend. The dividend provides at least $42.5 million in annual income to the family, according to Bloomberg.
We think the dividend is safe. We think Ford’s sales and profitability will improve. Ford will cease to sell traditional sedans in the United States over the next few years. The auto portfolio will be composed primarily of crossover, SUVs, and trucks. These are all profitable models.
Ford should remain profitable in the interim. Analysts expect Ford to earn $1.40 per share next year. Ford shares trade at less than seven times forward earnings estimates.
We view the drop below $10 as a buying opportunity. The lower share price lifts the dividend yield up to 6.3%. That said, properly gauge your risk tolerance as share-price volatility is likely the norm over the next six-to-12 months.
