Ford (NYSE:F) stock may not yet have seen the worst of the downturn. It is down by more than 50% from its 52-week highs. But that is not all. Ford cut the dividend to zero. So there is no buffer for F stock.
But let’s look forward. When is the earliest that Ford might consider restoring the dividend? That will stabilize the stock.
You might recall that I wrote several articles here over the past six months arguing that Ford could not afford its dividend.
In one article in December, I pointed out that the high dividend yield was a sign that the market agreed with me. Obviously I did not know the coronavirus impact would force Ford to cut the dividend.
But I also suspect Ford may not completely restore the prior dividend per share. Let’s look at the numbers.
Estimating Production and Revived Earnings
Like many businesses, Ford’s second and third quarters produce lower numbers. Indications are that March sales will be 40% lower year-over-year. Let’s assume that April-June 30 sales will be at least 50% lower.
That would put June quarter sales at 50% of $38.85 billion, or $19.4 billion. Ford’s quarterly gross profit margin is only 7% or so. In addition, the cash flow from operations (CFFO) margin was 7.3%.
So at a reduced sales level of $19.4 billion, the CFFO that could be expected was $1.4 billion. However, this will not support Ford’s normal capex spending of $2.27 billion. And it clearly will not leave room for the quarterly dividend of $595 million per quarter.
Estimating the Potential Dividend Per Share
Ford’s capex spending runs about 5.7% of sales. So even if capex was cut to 5.7% of sales, or $1.1 billion, plus the dividend cost of $595 million, total uses of FCF will be $1.695 billion. That is higher than the expected CFFO of $1.4 billion estimated earlier.
The difference is $295 million ($1.4 billion in CFFO minus $1.695 billion in total uses). That represents a potential 50% cut in the normal dividend (i.e., the $295 million shortfall divided by $595 regular dividend).
I do not think Ford will reduce the dividend by 50% right away after they start up production. They would likely wait until there was a margin of safety.
For example, let’s assume that by Q3 end sales have fallen only 20%, not 50%, from the prior year. Using the same ratios, estimated sales would be $29.6 billion. and CFFO would be $2.16 billion (7.3% of sales).
After capex spending of $1.69 billion (5.7% of sales), that leaves $473 million to pay dividends. This implies a cut to the normal quarterly dividend of 20% (i.e., $473 million divided by $595 million). The annual dividend per share would then be $0.48 per share, instead of 60 cents per share.
Estimating F Stock’s Value
In the last four years, F stock has traded an average dividend yield of 7.16%, according to Seeking Alpha. And the yield is much lower is you don’t count the higher yields during 2020.
Therefore, taking the lower dividend per share of 48 cents and dividing it by 7.16% results in an estimated value of $6.70 per share. That represents a potential gain in F stock of 29% from today’s price.
And if you use a more normalized dividend yield of 5.43% for the last four years, without 2020, the estimated value is $8.84 per share. That represents an upside in F stock of 70%. That won’t likely occur until next year when production starts to reach normal levels.
What Should Investors Do
The reason I ran these numbers is because the stock market always anticipates the future. We have used a conservative estimate for the future. We assume Ford will cut its dividend by 20% sometime by the end of the year or maybe next year.
It simply can’t afford to keep paying the same level of dividends as before as well as keep the same level of capex spending. I have written several articles about this already.
Look for Ford to restore the dividend sometime in the next three quarters or so, but at a reduced rate. We have used a sufficient margin of safety in our methodology. If that case F stock looks to rebound anywhere from 29% to 70% from today’s price over the next year.
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.
