Mohit Oberoi - Barchart - Tue Apr 16, 6:30PM CDT
With a dividend yield of just under 5%, Ford (F) looks like an attractive dividend play for income-seeking investors. The yield is over three times what the average S&P 500 Index ($SPX) company pays, and Ford has been gradually raising those payouts - and even announced a special dividend earlier this year. However, is your dividend income from Ford stock safe amid the price war in the electric vehicle (EV) industry? We’ll discuss in this article.
The fact that automakers across the board are struggling to sell EVs became even clearer when Tesla (TSLA) recently decided to lay off 10% of its global workforce. The announcement came a couple of weeks after the Elon Musk-run company reported a YoY fall in its Q1 deliveries. Its deliveries not only fell well short of the market's tepid expectations, but also marked the first time since 2020 that its shipments fell on a YoY basis.
EV Demand Has Slowed Down Significantly
Tesla said that the fall in deliveries was “partially due to the early phase of the production ramp of the updated Model 3 at our Fremont factory and factory shutdowns resulting from shipping diversions caused by the Red Sea conflict and an arson attack at Gigafactory Berlin.”
While that argument has merit, it still does not explain the massive gap in Tesla’s production and deliveries, and shows a massive inventory buildup. The demand for electric cars has been much weaker than what most observers predicted, and companies are struggling to sell cars to capacity.
Ford has also scaled down its once-ambitious EV plans and is “flexible” about the 2 million annual EV production target that it originally set out for 2026. The demand-supply mismatch in the EV industry is contributing directly to the price war, and only adding to the woes of automakers. Ford, for instance, expects its EV business - which it previously rechristened Model e - to lose between $5 billion and $5.5 billion in 2024, on a pre-tax basis. It also no longer expects the segment’s pre-tax margins to hit 8% by 2026.
The EV Price War Is Not Getting Any Better
The EV price war is not getting any better, nor is Ford backing down from competing with Tesla. The company is offering a $1,500 rebate to existing Tesla car owners if they buy a Ford F-150 Lightning in a scheme that's dubbed “Tesla Competitive Conquest Bonus Cash."
As the EV industry’s woes look far from over - and with some economists still expecting a recession - there are bound to be apprehensions over the sustainability of Ford's dividend, especially given the company's positioning in a cyclical industry.
Is Ford’s Dividend Safe?
To begin with, dividends are a discretionary payout and companies can tweak their dividend policy based on the macro and micro environment. Ford, for instance, suspended its dividend altogether in 2020 amid the COVID-19 pandemic. However, the dividend was restored it in October 2021 with a quarterly payout of 10 cents. Rival General Motors (GM), which also suspended its dividend in 2020, waited a bit longer than Ford, and reinstated its dividend only as recently as August 2022.
While the possibility of another black swan event like COVID-19 can never be predicted, we need to look at the company’s intent and ability to keep paying the dividends.
Ford intends to return between 40%-50% of free cash flows to shareholders, which is a healthy payout ratio considering the cyclical nature of the automotive industry. It is also slowing down its EV investments, which will drive down capex and thereby lead to higher free cash flows.
The company expects to post free cash flows between $6 billion to $7 billion in 2024, as compared to $6.8 billion in 2023. Ford’s dividends look well covered for 2024, at least, looking at the expected cash flows.
But What About the Long Term?
While EV sales are slowing down, Ford is doubling down on hybrids. Hybrid demand has been quite good, as the product appeals to that set of buyers who are wary of battery electric cars due to reasons ranging from high initial buying price to range anxiety. No wonder, then, that General Motors is bringing back hybrid cars to North America.
Also, Ford’s internal combustion engine (ICE) and commercial business continue to be cash cows, and will help it to absorb the sprawling EV losses. Ford has a lot of flexibility between ICEs, hybrids, and electric cars, and can adjust its production based on the demand environment. The Detroit automaker also has a strong balance sheet, and had almost $29 billion in cash and cash equivalents at the end of 2023.
Overall, given its flexible business which is not overly reliant on EVs, a strong balance sheet, and continued free cash generation, Ford should be able to maintain its hefty dividend payouts for the foreseeable future – unless, of course, we hit a major recession or a black swan event.
On the date of publication, Mohit Oberoi had a position in: F , GM , TSLA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
