While shares of legacy automakers like Ford (F) and General Motors (GM) have sagged over the last few years, investors have been in for a payout bonanza. Ford, for instance, paid a supplemental dividend of 18 cents per share earlier this year. That was preceded by a special dividend of 65 cents in 2023, as well.
Should Ford shareholders expect yet another special dividend in 2025 - on top of its nearly 5% dividend yield - or will the company instead go for a share repurchase? We'll discuss in this article, beginning with Ford’s dividend history.
Ford Dividend History
Ford announced a dividend of 15 cents per share in January 2020, which was suspended as quickly as March of that year, amid the COVID-19 pandemic.
However, Ford's dividend was restored in October 2021, with a quarterly payout of 10 cents per share. Rival General Motors, which also suspended its dividend in 2020, waited a bit longer than Ford, and reinstated its dividend as recently as August 2022.
Meanwhile, Ford increased its payout by 50%, and announced a quarterly dividend of 15 cents in July 2022. The company has since maintained the same quarterly dividend, but has topped them up with special dividends in 2023 and 2024.
Ford’s dividend has been quite stable, and the company’s quarterly payout was 15 cents even before the automaker suspended its dividend in 2020. While one might rightly argue that Ford’s dividends haven’t increased in nearly a decade, we should also consider the cyclical nature of the automotive industry, along with the transition to electric vehicles (EVs).
The Automotive Industry Is Going Through a Churn
The automotive industry is going through a churn, and sales of electric cars are rising at the expense of traditional internal combustion engine (ICE) cars. To be sure, even legacy automakers like Ford and GM have invested in their EV capacity to stay in the game amid the EV pivot.
However, the EV transition has been much slower than expected, especially in the U.S. market. The enthusiasm towards electric cars has been subdued, and now it seems that automakers misread the craze among early adopters as an extrapolation of the entire market. Meanwhile, Ford is doubling down on hybrids – whose sales have been relatively strong – and expects to launch hybrid models across its lineup.
Amid the slowdown in EV sales, Ford has also gone slow on its ramp-up, and withdrew its ambitious EV production targets. Ford Model e, which houses the company’s EV business, posted a massive pre-tax loss of $4.7 billion in 2023, as the Detroit automaker lost over $40,525 on average for every EV that it sold. The company expects the segment’s losses to widen to between $5 billion-$5.5 billion in 2024.
The automotive industry’s woes look far from over, which is also reflected in stock prices. Ford, for instance, is down 1% this year, while Tesla (TSLA) is among the worst-performing S&P 500 Index ($SPX) stocks. General Motors stock, however, is up a cool 28.8% this year.
Legacy Automakers Are Generating Healthy Free Cash Flows
Legacy automakers are posting healthy cash flows, which they are using to reward shareholders. GM, for instance, expects to post adjusted automotive free cash flow between $8.5 billion-$10.5 billion this year, while Ford expects to post free cash flows between $6 billion to $7 billion. Incidentally, both companies raised their guidance during their respective Q1 2024 earnings calls.
GM is on a share repurchase spree, and recently announced a $6 billion share buyback that will go into effect next month after the company exhausts the previous $10 billion authorization it announced last year.
Ford’s Dividend Payout Policy
Ford intends to return between 40%-50% of free cash flows to shareholders, and over the last couple of years, its payout has been towards the upper end of that range.
Looking at the company’s free cash flow guidance, it should have spare cash available to distribute among shareholders by the end of the year. Meanwhile, the question here could be - should Ford announce a special dividend, or opt for a share repurchase, like rival General Motors?
Should Ford Announce a Share Buyback Program Like General Motors?
GM stock is up an impressive 66% since November 29, 2023, when the company announced an “accelerated” share repurchase plan of $10 billion. Ford, however, has gained just under 18% over the period.
The financial performance of both companies has been largely similar over the period, and while other factors might have played a part, I believe the divergence is largely due to GM’s share repurchases.
That said, GM’s share repurchases were quite significant, and between the two tranches it has announced, the company will extinguish nearly 30% of its outstanding shares. Notably, since GM’s dividend payout is much lower than Ford’s – its dividend yield is a mere 1% - the company has a lot of cash to play around with after paying the normal dividend.
Now, for Ford to announce a mega share buyback, the company might either need to dip into the $25 billion in cash on its balance sheet, or cut down its regular dividend greatly. The possibility of a dividend cut looks quite unlikely, as they are generally seen as a negative. Also, the company would want to be conservative and maintain healthy liquidity amid the uncertain economic environment, so it might not like to reduce its cash holdings much.
However, I believe a better strategy for Ford could be to use some cash on its balance sheet and top that up with the cash it will have left after paying the regular dividend and use the proceeds for a share repurchase. With Ford stock trading at a mid-single-digit price-to-earnings multiple, a share buyback would make perfect sense for the company and might help propel the stock higher - just as we have seen with GM.
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.
