Investors seeking income have cast a hopeful eye on Ford (F) with its enticing dividend yield of nearly 5%. This robust figure stands head and shoulders above the average S&P 500 Index company’s dividends. Ford’s upward momentum involves a climb in payouts, punctuated by a special dividend earlier this year. However, amidst the fierce electric vehicle (EV) industry price war, can Ford’s dividend remain a steadfast source of income for its shareholders?
As Tesla (TSLA) grappled with diminishing sales, reflected in their decision to reduce their workforce by 10%, the challenges faced by automakers in the EV domain have come into sharp focus.
The Struggle of EV Demand
Tesla attributed the decline in deliveries to various factors, including production hurdles at the Fremont factory and disruptions caused by external events. This, however, fails to fully account for the substantial deviation in production and the resulting inventory surplus. The tepid demand for electric vehicles has caught many off guard, leaving companies grappling to offload their stock.
Ford, initially bullish in its EV pursuits, has adjusted expectations, demonstrating flexibility around its targeted EV production numbers. The jarring disparity between EV supply and demand is propelling an industry-wide price war, compounding the challenges faced by automakers. Ford forecasts substantial losses in its EV segment for 2024, accentuating the tumultuous terrain of the EV battleground.
Intensifying EV Price Battle
The EV price showdown shows no signs of abating, with Ford refusing to cede ground to Tesla. Akin to a high-stakes poker game, Ford has introduced a $1,500 rebate aimed at enticing Tesla owners to switch allegiance to the Ford F-150 Lightning, in a move termed as “Tesla Competitive Conquest Bonus Cash.”
Amid lingering EV industry turbulence and whispers of an impending recession, concerns loom over the security of Ford’s dividend, particularly given its entrenched position within a cyclical domain.
Stability of Ford’s Dividend
Delving into the realm of dividends reveals a discretionary facet subject to the ebbs and flows of the economic backdrop. Ford, reminiscent of its resilient spirit, suspended its dividend during the 2020 pandemic onslaught, only to reinstigate it in October 2021 at a quarterly rate of 10 cents. In a parallel move, rival General Motors (GM) revived its dividend in August 2022, following a hiatus triggered by the pandemic.
While the specter of unforeseen catastrophic events lingers, an assessment of Ford’s commitment and capability to sustain dividend payouts becomes imperative. Ford earmarks 40%-50% of free cash flows for shareholder returns, exhibiting a balanced payout ratio in light of the sector’s cyclical nuances. Concurrently, a recalibration of its EV investments is set to alleviate capital expenditures, paving the way for augmented free cash flows.
Having projected free cash flows within the range of $6 billion to $7 billion for 2024, vis-a-vis $6.8 billion in 2023, Ford’s dividend outlays appear well cushioned for the near future.
Long-Term Viability
While EV sales slacken, Ford pivots towards hybrids, aligning with market inclinations. The resurgence in hybrid demand, coupled with the apprehensions surrounding battery electric vehicles, underscores a pivotal niche for Ford to exploit. General Motors’ endorsement of hybrid models in North America corroborates this strategic shift.
Supported by a sturdy foundation of internal combustion engines and commercial vigor, Ford is primed to absorb the adverse impact of EV setbacks. With a repertoire spanning ICEs, hybrids, and electric vehicles, Ford boasts operational agility to adapt to shifting market dynamics. Bolstered by a robust balance sheet housing nearly $29 billion in cash reserves as of end-2023, Ford’s dividend outlook appears resilient.
Optimally positioned with a diversified business model, a formidable financial base, and sustained cash generation, Ford seems poised to uphold its generous dividend distributions in the foreseeable future – unless, of course, unforeseen cataclysms or a seismic recession disrupt the status quo.