Why Ford’s Dividend Still Looks Safe After Moody’s Downgrade to Junk

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We have yet to see an updated report out of CFRA after the news, but the firm has a Hold rating and $10 target on last look. The most recent report called the dividend secure:

Our 12-month target of $10 is based on 7.4x our 2020 EPS estimate, a meaningful and justified discount to the stock’s five-year average forward P/E multiple of 8.0x, in light of reduced earnings visibility, cost pressures, extremely weak vehicle sales trends in China and late-cycle global automotive market conditions. Peer valuations have contracted as the economic cycle matures, and we expect lower U.S. industry volume We believe the current $0.60 annualized dividend is secure.

CFRA did further note:

The company pays one of the industry’s most generous dividends ($0.60/share annualized), which has remained unchanged since 2015. It also declared a $0.13/share special dividend in January 2018, but we don’t expect a special dividend to be paid again in 2019.

When Goldman Sachs reiterated its Buy rating on Ford and raised its target to $13 from $12 earlier this summer, the report made no mention of a lurking dividend risk. That said, it also didn’t point to Ford becoming less than investment grade in its corporate credit rating.

In July of 2019, S&P maintained its BBB credit rating but had a Negative credit watch on the company. S&P even noted at that time that it believed a one-notch downgrade was still likely sometime in 2019, if Europe and China are unlikely to approach breakeven over the next 12 months. S&P did also note that a two-notch downgrade to speculative-grade (junk) was unlikely over the next 24 months unless a higher risk of recession coincides with a lack of profitability improvements in Europe and China.

In May of 2019, Fitch Ratings maintained its BBB credit rating for Ford and Ford Motor Credit. At that time, Fitch also said that its rating outlook for both Ford and Ford Credit was revised to Negative from Stable.

While the dividend discussion is merited, it does not seem that the common dividend is at any great risk of being cut in the aftermath of the Moody’s cut to junk status.

It is important to consider that Ford paid out $2.905 billion in common dividend payments in 2018.

24/7 Wall St. decided to dig through Ford’s annual report (10-K for the year 2018) to see if there were any dividend stipulations that needed to be considered. Of the 22 mentions of “dividend” in the 10-K report for 2018, the following were the mentions and incidents where “dividend” and potential changes may come into play.

On pension and other post-retirement liabilities:

If our cash flows and capital resources were insufficient to meet any pension or OPEB obligations, we could be forced to reduce or delay investments and capital expenditures, suspend dividend payments, seek additional capital, or restructure or refinance our indebtedness.

On liquidity:

One of our key priorities is to maintain a strong balance sheet, while at the same time having resources available to invest in and grow our business. Based on our planning assumptions, we believe we have sufficient liquidity and capital resources to continue to invest in new products and services, pay our debts and obligations as and when they come due, pay a regular dividend, and provide protection within an uncertain global economic environment.

Ford shares were trading down 3.5% on Tuesday to $9.20, and the 30 million shares that had traded in the first 90 minutes of the session was already approaching a normal day’s trading volume. Ford’s 52-week range is $7.41 to $10.56.

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