In 2009, high unemployment and tight credit sent car sales plunging to 10.4 million. It was the lowest level in 27 years. Carmakers were forced to accept rescue loans from Washington or cut their dividends (or both) to survive.
But it didn’t take long for the auto industry to come roaring back. Carmakers experienced seven straight years of annual sales growth. And in 2016, automakers sold a record 17.4 million cars and light trucks in the U.S.
However, the trend reversed last year. In 2017, auto sales fell 1.8% to 17.2 million. And analysts expect sales to keep falling in 2018 to just 16.8 million.
Automakers have become victims of their own success. The drivers of the car-buying frenzy, cheap credit and pent-up demand are drying up. So sales are heading south.
Declining sales often lead to declining free cash flows (FCFs) and – if the decline in cash flow is large enough – dividend cuts. Automakers have proven that they are not immune.
Marc reviewed the safety of Ford’s (NYSE: F) dividend in May 2016. Back then, SafetyNet Pro gave the company a C due to declining FCF.
Marc didn’t believe a dividend cut was imminent given the company’s low payout ratio. But he didn’t think it was safe either. Ford proved in 2001 and 2006 that it was willing to cut – or even eliminate – its dividend.
Let’s find out whether Ford’s dividend safety has improved and how likely it is to survive the latest downturn in U.S. auto sales.
A Dividend Safety Adjustment
Record auto industry sales meant that Ford generated lots of FCF. In 2016, Ford generated FCF of $12.8 billion. That was up 42.63% from the nearly $9 million of cash it banked in 2015. And it was 237% higher than 2013’s FCF.
But last year was a tough one for Ford. Besides dealing with the downtick in auto sales, the company “retired” (fired) one CEO, hired a new one and initiated an aggressive turnaround plan. Ford is investing in new technology like autonomous cars to help it compete in the future.
In the end, these investments could be beneficial to Ford’s dividend. But right now, they’re taking a bite out of the company’s FCF. And Ford’s gross margins are being squeezed too, as the auto giant has to offer higher and higher incentives to sell its cars.
For 2017 though, Ford’s FCF is projected to tank to $4.9 billion. But that number is still more than enough to comfortably cover the $2.4 billion Ford paid out in dividends for the year. That gives the company a payout ratio of just 49%.
Combined with the fact that Ford’s last dividend cut is now more than 10 years old, Ford gets a dividend safety upgrade.
But don’t get too comfortable with Ford’s dividend safety. A big SafetyNet Pro downgrade is on the horizon.
In 2018, Ford’s FCF is expected to fall even further to $2.7 billion. And while it will be enough to fund the dividend, Ford’s payout ratio will rise to 88.9%. That’s well above SafetyNet Pro’s 75% comfort level.
Though Ford’s dividend is relatively safe for now, its cash flow is going the wrong way. And if the company doesn’t do something to reverse the decline soon, the dividend could be run over.
Dividend Safety Rating: B
Marc will be back next week. If you have a stock whose dividend safety you’d like him to look at, leave the ticker in the comments section below.