The Road to Financial Decisions: Ford’s Dividend or Share Buyback?
Investors in legacy automakers like Ford and General Motors have been on a rollercoaster ride recently. Despite the rollercoaster of Ford (F) and General Motors (GM) share prices, shareholders have been waiting eagerly for potential payouts. Ford surprised with a 65 cents special dividend in 2023 followed by an 18 cents per share supplemental dividend earlier this year.
Driving Through Ford’s Dividend History
Ford took a hit with a suspended dividend of 15 cents per share in the midst of the COVID-19 pandemic but swiftly brought it back at 10 cents per share in October 2021. General Motors followed a similar path, with dividends reinstated in August 2022. Ford upped the ante with a 50% raise to 15 cents per share in July 2022, stacking up its payouts with special dividends in subsequent years.
Although Ford’s regular dividends have stayed put for nearly a decade, the volatility mirrors the cyclical nature of the automotive industry, especially amidst the ongoing electric vehicle (EV) revolution.
Shifting Gears in the Automotive Industry
The automotive landscape is experiencing a seismic shift towards EVs, albeit slower than anticipated. Despite legacy automakers like Ford and GM expanding their EV portfolio, the craze for electric cars has not translated into proportionate market growth.
Notably, Ford faced setbacks in its EV endeavors, leading to substantial losses. With Ford’s EV segment bleeding billions, the company is recalibrating its strategy amidst a challenging market environment.
On the Cash Highway: Legacy Automakers’ Financials
Both Ford and GM boast robust cash flows, a silver lining amidst the industry’s turbulence. GM is on a share repurchase spree after announcing a $6 billion buyback following a prior $10 billion authorization last year.
Steering Towards Financial Moves: Ford’s Dilemma
Ford typically aims to distribute 40%-50% of free cash flow to shareholders, hinting at potential returns for investors. With Ford maintaining healthy cash reserves, the question arises – will Ford opt for another special dividend or follow in GM’s footsteps with a share repurchase?
Should Ford Follow GM’s Lead on Share Buybacks?
GM’s stock soared after a massive share repurchase plan, highlighting the appeal of GM’s financial maneuver. While Ford’s financial performance aligns closely with GM’s, the lack of similar share repurchases may have impeded Ford’s stock growth.
For Ford to initiate a significant share buyback, tapping into its substantial cash holdings or adjusting its dividend policy are viable options. However, given Ford’s cautious approach and the need to maintain liquidity, a drastic dividend cut seems improbable.
An alternative strategy could involve utilizing excess cash for a share repurchase, leveraging Ford’s low price-to-earnings ratio to boost stock performance, following GM’s successful model.