Ford Motor Company (NYSE:F) did something funny on Thursday. The Dearborn, Michigan-based car company boosted its quarterly dividend by a full 20%, just days after reporting lackluster sales in December that stacked up poorly to the rest of the auto industry.
So what can income-hungry investors take away from the automaker’s move? Is it a bluff, a bullish signal for F stock, or neither?
Ford Is a Best-in-Class Dividend Stock
After raising its quarterly dividend from 12.5 cents to 15 cents, Ford’s annual dividend yield sits at 3.9%, easily higher than the next-best yield from a major auto manufacturer. General Motors Company (NYSE:GM) pays 3.3%; Toyota Motor Corp (NYSE:TM) doles out 2% annually and India’s Tata Motors Limited (ADR) (NYSE:TTM) returns a meager 0.3% to its shareholders through dividend payments.
Ford’s superior dividend isn’t enough to justify F stock as a buy in and of itself, but it offers a compelling bullish argument. With rare exceptions, companies simply don’t increase dividends if they don’t feel they’re sustainable in the long-term. And with a payout ratio around 53%, Ford is paying out just over half of its earnings in the form of dividends, which leaves enough room to cushion against future losses and reinvest in the business.
But therein lies the concern: Ford’s business. In December, Ford sales rose just 1%. While Ford’s dividend yield stacks up very favorably to the competition, the company’s rivals blew Ford out of the water in December. Consider the December sales gains from its peers:
- Toyota: +12.7%
- General Motors: +19%
- Tata Motors: +10%
- Chrysler: +20%
On paper, F stock looks far less attractive than it did on the merits of that 3.9% dividend yield alone. But the market expected soft sales from Ford in 2014 — the company consciously pulled back on its sales to rental companies, and the big switch to aluminum-bodied F-150 trucks caused inventory shortages as the new manufacturing plant was slow to come online.
2014 was Ford’s year to work out the jitters of the F-150 redesign. Last year was also characterized by a ton of new vehicle launches, so as those are increasingly adopted, 2015 should play out much more smoothly.
And while the company’s sales were down marginally in 2014 from 2013, there still were some material highlights that should carry over to 2015.
The Ford Fusion and Ford Escape both broke sales records last year, proving that the brand itself isn’t going stagnant. In China, Ford’s sales rose 19% from the year before, and December sales growth in China clocked in at 13%.
With the kinks finally worked out of the new F-150 production process, oil prices at multiyear lows, five straight years of U.S. sales growth in the auto industry and 2014 marking the biggest year for U.S. auto sales since 2006, F stock is primed for success.
Ford is in a great position moving into the new year, and with F stock now dishing out a nearly 4% dividend, Ford investors are in a pretty good position, too.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid.