Another Reason to Buy Ford Now
The company is currently trading at less than 7 times earnings. Under super-CEO Allan Mulally's leadership, Ford has been successful in decreasing its total debt for 14 consecutive quarters. The company also has done a remarkable job in reducing its breakeven point. In 2006, U.S. industry sales had to total 17.1 million vehicles for Ford to avoid losing money. That number is now 12.8 million.
Enter today's big news; Ford has reinstated its dividend and will pay shareholders $0.05 per share on March 1. While not unexpected, this is another step that shows the progress that Ford has made since it was near bankruptcy just a few years ago.
Of course, this is not a monster dividend, and Ford is certainly not going to fool anyone into thinking it's a high yielder. At Ford's current price, the annual yield on a $0.05-per-quarter dividend would be around 1.85%, less than the average yield of the S&P 500. But this is all about baby steps. As Ford CFO Lewis Booth said, "We'd like the dividend to be sustainable. As our results improve, we may raise it."
What happened today?
So if Ford brought its dividend back, something investors have been waiting for, why did the company's stock end the day more than 1% lower than the Dow?
Well, probably in large part because analysts had expected a dividend of about $0.08 per share from Ford. But as I said, this is just the first step for Ford. Look for the company to increase its dividend when its balance sheet can support it.
|General Motors (NYS: GM)||0%|
|Toyota (NYS: TM)||1.88%|
|Honda Motor (NYS: HMC)||2.45%|
|Tata Motors (NYS: TTM)||2.49%|
Source: Google Finance.
*Ford's annual dividend rate assuming $0.05 quarterly dividends.
Ford's dividend yield trails Honda and big Indian auto manufacturer Tata Motors by about a half of a percentage point. GM has said it doesn't plan on instituting a dividend until it can better shore up its underfunded pension plans.
Into the future
Perhaps even more importantly than paying dividends is that following Ford's deal with the UAW, all three major credit-rating firms have the company now sitting just one step below investment-grade. Once Ford reaches investment-grade, it will allow many mutual and retirement funds that require such a rating to purchase stock in the company.
As you can tell, I'm bullish on Ford in the long run. I believe that the company can remain profitable even in the worst of times and has plenty of room to run once the economy recovers. The dividend is just icing on the cake.
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At the time this article was published Brendan Byrnes and The Motley Fool own shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of General Motors and Ford. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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