FordJoe Raedle
Ford Motor Co. has chosen an odd time to reinstate the company's dividend after a five-year hiatus. Europe, one of its major markets, is mired in sovereign debt woes that could drag several countries into, or further into, recession. The United States, the auto maker's home turf, is still wobbling economically. And Ford has yet to meet one of its own core criteria for bringing back shareholder payouts: recouping its investment-grade credit rating. All in, that makes the move pretty bold – yet still defensible.
For starters, Ford is hardly languishing in junk-bond hell. Its restructuring efforts under chief executive Alan Mulally are paying off. In the 12 months to September, for example, Motown's second-largest vehicle manufacturer has turned a net debt position into $8-billion (U.S.) of net cash. It looks more likely that the rating agencies are being cautious about being seen to upgrade too early than concerned about Ford's fundamental financial health.
More importantly, Ford isn't exactly flooring it with the dividend. Granted, at 5 cents a share per quarter, it's the same as when it halted payments in 2006. But that represented almost half its 2005 earnings, which in any event relied on a strong showing from the lending arm. Now, however, the $760-million in annual dividends it will start handing over next March amounts to less than 10 per cent of expected net income and only about a tenth of free cash flow.
That leaves enough left over for Ford to play catch-up in fast-growing emerging markets, including China, overhaul its unprofitable European division and maintain investments in new products. The payout looks manageable even if a severe downturn were to, say, halve profit.
Ford already stands apart, having restructured most – and not just its balance sheet but also its culture and operating processes. Becoming the first to distribute cash back to shareholders, in a sustainable fashion, only reinforces its spot in the pole position.