Some in the media have suggested that Elon Musk was right when he stated sarcastically that institutional investors upset with Tesla Inc (NASDAQ:TSLA) and its corporate governance should buy Ford Motor Company (NYSE:F) instead.
Recently, I wondered if Ford stock could ever hit $20, a share price not seen since June 2001. I argued that dividends were not the answer; share repurchases, smart R&D investments and increased debt repayments were.
What I hadn’t thought about were the special dividends.
In early January, Ford declared a special dividend of 5 cents to go along with the usual quarterly payout of 15 cents. That’s on top of the special dividend of 25 cents paid to investors a year earlier.
Over the past 16 months, Ford stock generated $1.20 in regular and special dividends for an annualized yield of 8.1%. That’s awfully hard to resist in the low-yield era.
Ford Stock Special Dividend
In 2016, Ford had $12.8 billion in free cash flow, its highest level in the past decade. Of that, $1 billion was used for special dividends (25 cents multiplied by an average of 4 billion shares outstanding) and $2.4 billion for regular dividends, leaving lots of cash for debt repayment.
Over the past five years, Ford issued and repaid $207.8 billion and $158.3 billion in debt, respectively. In 2012, it added just $3.2 billion in net debt (Debt issued minus debt repaid), its best job of trimming the debt load, followed by 2016 when it added $7.2 billion in net debt.
So the question for owners of F stock going forward is: Which is more preferable — Higher special dividends or increased debt repayment? Income investors would likely answer the former, but that’s short-sighted in my opinion considering higher interest rates are just around the corner.
Ford shareholders would benefit greatly from a leaner balance sheet. That’s especially true considering that profits in 2017 are expected to be lower than this past year, with a nice rebound in 2018 off of new product introductions. That includes the Ford Bronco and higher margins due to $3 billion in cost reductions.
In 2016, Ford distributed $3.5 billion to investors. In 2017, it expects that number to fall to $2.8 billion as a result of a special dividend one-fifth of the size as last year. If Ford’s profits in 2017 are equivalent to those in 2014, its free cash flow should be around $7 billion dollars. That only leaves a little more than $4 billion for debt repayment, share repurchases, etc.
I’m a proponent of share repurchases in this instance because F stock is so beaten up, but I believe debt repayment should take precedence. If Ford stock moves up to $15 by the fall, however, Ford management would be wise to slow its debt repayment and begin buying its stock in earnest as we move into the final quarter of the year.