Receiving a key credit rating downgrade can be a painful experience for many companies. When a company with an investment grade credit rating is downgraded to “junk bond” status, investors have every right to worry about that company’s future borrowing costs. If borrowing costs increase too much, then the cost of capital easily could interfere with a company’s desire or ability to pay an aggressive dividend to its common stockholders.
This brings up a classical debate about the safety of Ford Motor Co.’s (NYSE: F) super-high dividend yield. Even before Ford’s shares fell 4% in the aftermath of the credit rating downgrade, its prior $9.54 closing price and the $0.60 annualized dividend per common share generated a dividend yield of about 6.3%.
Note that the Moody’s Ford downgrade was far more cautious than the equivalent agency ratings of both Standard & Poor’s (S&P) and Fitch.
As far as whether Ford’s dividend would be at risk, its new yield with a lower price is now 6.5%. That is among the highest dividend yields among the S&P 500. A Finviz screen of the S&P stocks indicates that it would currently be the 10th highest yield of all S&P 500 stocks.
24/7 Wall St. had opined that Ford and rival General Motors Co. (NYSE: GM) were likely to be viewed as having a safe dividend even in the next recession. That is predicated on the next recession being of the “garden variety” type rather than like the Great Recession a decade ago. That said, Moody’s recently (August 29) indicated that GM has maintained a competitive presence even as the auto market demand softens. GM’s common stock dividend is more conservative than Ford’s and is currently just under 4%.
We wanted to see if there have been any major concerns about the safety of Ford’s super-high dividend yield in the wake of the fresh Moody’s credit rating downgrade. It’s impossible to say that a dividend will never be at risk, but the fresh downgrade does not appear to come with any major immediate risk to Ford’s payouts. If things continue to deteriorate, that’s another issue.
While the Moody’s downgrade was harsh on Ford’s current business and the headwinds it faces, the entire downgrade did not even address the safety or a recommendation about what Ford’s management team should do (or consider) about its high dividend. This has created a potential vacuum as some investors would have every right to worry about Ford’s dividend yield now that its credit rating has moved down into junk bond territory.
24/7 Wall St. has pulled multiple reports and opinions about how Ford should be viewed after the downgrade. Despite some concerns about higher borrowing costs ahead with a noninvestment grade, the equity analysts lived up to their tradition of not downgrading Ford’s equity ratings just because of the credit rating cut.
Credit Suisse’s Dan Levy and Robert Moon still have an Outperform rating on Ford, but they did opine about the safety of that high dividend:
Improvement at Ford must be underlied by free cash flow recovery. When taking into account Ford’s underlying EBIT and $7 billion of restructuring cash calls over the coming years, we estimate that Ford will need to use its balance sheet to partially fund its dividend. Given a robust cash balance and what we see as a trajectory of EBIT improvement, we believe the dividend is safe. Yet the Moody’s downgrade reminded us that with slightly less buffer vis a vis liquidity, to the extent more pronounced cycle issues emerge and liquidity is further challenged, Ford will need to revisit the feasibility of its dividend.
Merrill Lynch reiterated its Buy rating and still has a $13 price objective. The firm’s John Murphy sees much of the bad news already baked in here. On the dividend, his report said this:
Although we do not disagree with many of the concerns raised by Moody’s, we believe Ford’s dividend will be maintained for the foreseeable future, which should provide support for the stock. Furthermore, the near-term product cycle is robust, specifically in North America, the Global Redesign is making progress, and the credit rating downgrade alone should not materially increase costs.