At first glance, with a dividend yield approaching 5%, Ford (F) stands out as a beacon of dividends for yield-hungry investors. Surpassing the average S&P 500 Index company payouts by over threefold, Ford has been steadily increasing its dividends and even threw a special dividend investors’ way earlier this year. But can this cozy dividend income blanket you’ve laid out with Ford withstand the unforgiving chill of the ongoing price war in the electric vehicle (EV) realm? Let’s navigate through this quandary.
The EV market’s struggle to move units has been laid bare, with Tesla (TSLA) opting to trim its global workforce by 10% recently. This move followed Tesla’s first YoY drop in Q1 deliveries since 2020, falling short of not just tepid market expectations but also highlighting a significant inventory bulge.
EV Demand Has Slowed Down Significantly
Tesla attributed the delivery downturn to snags in the transition phase of the updated Model 3 production at its Fremont plant, compounded by factory shutdowns stemming from geo-political tensions and an unfortunate arson incident at Gigafactory Berlin.
Despite these justifications, the glaring chasm in production and deliveries persists, underscoring a glaring slump in electric vehicle demand that even Ford, once bullish on EVs, has had to recalibrate its ambitions, displaying a willingness to adjust its annual EV output goals from the initial 2 million targets set for 2026. The dismal demand-supply equilibrium in the EV space is fueling the price war flames, further burdening automakers. Ford, for example, anticipates an unpleasant pre-tax loss in the ballpark of $5 billion to $5.5 billion for 2024 from its EV endeavors. Moreover, it no longer envisions the segment’s pre-tax margins hitting the coveted 8% mark by 2026.
The Unyielding Battle in the EV Price Frontier
The EV price warfare shows no signs of retreat, with Ford unflinchingly standing its ground against Tesla. The company has rolled out a $1,500 incentive to entice Tesla vehicle owners, dangling the bait to snap up a Ford F-150 Lightning in a maneuver famously titled “Tesla Competitive Conquest Bonus Cash.”
As the EV quandary persists amid murmurings of an imminent recession, trepidation looms over the future of Ford’s dividend, nestling within the realms of a cyclical industry.
Is Ford’s Dividend a Rock of Stability?
Dividends sway at the whim of companies in response to the macroeconomic climate. Ford opted to suspend its dividend in 2020 during the COVID-19 storm but revived it in October 2021, offering a quarterly stipend of 10 cents. While no crystal ball predicts black swan events akin to COVID-19, a peek into Ford’s resolve and capability to sustain the dividend stream becomes imperative.
Ford aims to allocate 40%-50% of free cash flows back to shareholders, a sound payout ratio in light of the automotive sector’s cyclicality. Muting its foray into EVs will likely pare down capital expenditure, amplifying free cash flows. Projections foresee Ford’s coffers brimming with a freer $6 billion to $7 billion come 2024, a slight uptick from the $6.8 billion forecasted for 2023. The dividend harbor seems fortified for 2024, gauging by the anticipated cash inflows.
The Long-Term Horizon
While EV sales slacken, Ford pivots towards hybrids, buoyed by sturdy demand. Hybrids court buyers cautious of battery EVs, deterred by lofty upfront costs and the thorny issue of range anxiety. General Motors is unveiling a flurry of hybrid vehicles in North America, echoing the resonance with hybrid technology.
Ford’s internal combustion engine and commercial arm are lucrative milch cows, positioned to cushion the EV-induced fiscal hits. Embracing a mix of ICEs, hybrids, and EVs, Ford boasts nimble manufacturing efficacy per demand vagaries. The Motor City giant flaunts a robust balance sheet, flush with nearly $29 billion in liquid assets looming at 2023’s curtain call.
In the grand scheme of things, Ford’s diversified business model, impervious to EV monopolies, a stout fiscal skeleton, and a steady stream of cash flows signal a secure defense for its weighty dividends on the foreseeable horizon – unless thunderbolts of recession or black swan phenomena disrupt the landscape.