Ford (NYSE:F) stock sports a high dividend yield of 6.97% with its quarterly 60 cent dividend. But this dividend is not secure. I argued in my last article that Ford cannot afford that dividend.
Very little has changed since then. Ford will report its earnings on Oct. 23, so investors will be very attentive not only to Ford’s dividend payments but also to its free cash flow (FCF). FCF is the source of funds that pays for the dividends.
Ford Vehicle Sales Down
On Oct. 2, Ford reported that its total U.S. vehicle sales were down 4.9% over last year for Q3. That means its FCF will also be lower for Q3. Although truck sales were up 8.8%, both SUV and car sales were down. SUVs account for 34.1% of sales by vehicle count and cars are 15.7%.
This is not good for Ford’s FCF. Ford does not provide dollar figures for these drops, but SUVs fell by an astounding 29.5% in Q3. Year-to-date U.S. car sales have dropped 24.5% and SUVs by 5.0%. Trucks increased by 6.9%, helping slow the overall decline to just 3.5%.
Is the Ford Stock Dividend Safe?
A car company cannot continue paying the same dividend if its basic sales are faltering each quarter. For example, I pointed out in my last article that the dividend was barely affordable in Q2. The possibility that it is not covered by FCF in Q3 is very high.
However, I expect that Ford will declare the same quarterly dividend any day now. This is because it will be the fourth dividend this year at 15 cents per share. Companies tend to declare dividend cuts when they are close to announcing their full-year results.
Ford has paid the same quarterly dividend now for four full years. Any dividend cut would likely be about one third to one half. This is because Ford needs room to afford its transition to electric vehicles.
Ford Stock Dividend Cost
The 15 cents quarterly dividend costs $600 million. Ford produced only $2.1 billion in FCF as of Q2 end. If its FCF is now lower by 3.5%, in line with the U.S. sales drop, its second half FCF will only be $2.027 billion.
But the dividend costs $1.2 billion each half year. This will take up 59% of the H2 FCF. That leaves very little room to spare. If FCF has fallen more than 3.5%, as I suspect it has, the dividend could be cut starting in Q4 or Q1 of next year.
F Stock Dividend Yield History and Comparison
F stock has a high dividend yield. Often a stock’s dividend yield will rise when it becomes apparent that the company will have to cut the dividend. The chart below from Seeking Alpha shows that its dividend yield has been inching up over the past five years. This may be an indication that the market feels that F stock’s current 6.97% dividend yield is not completely affordable.
Another indication that the dividend may not be secure is that none of its competitors have such a high dividend yield. General Motors (NYSE:GM) stock has a 4.38% dividend yield. GM’s dividend cost $2.32 billion in the last 12 months.
GM’s FCF after capital expenditures and sales of property, plant, and equipment was $3 billion. That represents 77% of the adjusted FCF. That is a much higher proportion than Ford’s, yet its dividend yield is lower. And just like Ford, GM has not increased its dividend rate in the past five years.
What to Expect
Watch Ford’s free cash flow figures when they are released on Oct. 23. If it appears that the Ford stock dividend is affordable, you may see F stock rise and the dividend yield fall.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.
