Ford Motor Co. (F), which last week won ratification of a new contract with 40,600 U.S. union workers, may restart its dividend for investors with a 5-cent payout as early as January, according to an analysis by Bloomberg.
A dividend would be Ford’s first since September 2006, the month that Chief Executive Officer Alan Mulally joined the Dearborn, Michigan-based automaker. The decision is no longer predicated on a return to an investment-grade credit rating, Chief Financial Officer Lewis Booth said Oct. 20.
The new U.S. labor contract increases hourly costs by less than 1 percent annually, Ford said last week. Standard & Poor’s raised Ford’s credit rating two levels and Fitch Ratings bumped it up one level. The automaker, which reports third-quarter earnings tomorrow, may pay a quarterly dividend of 8 cents a share early next year, said Brian Johnson, an analyst at Barclay’s Capital.
“Getting the contract behind them opens the door to restoring the dividend and returning to investment grade,” said Johnson, who is based in Chicago and rates Ford “overweight.” “That is putting Ford back on the radar screen of portfolio managers who had pushed it aside when it lost its momentum after last year’s fourth quarter” earnings miss.
Ford’s U.S. auto sales rose 11 percent through September this year, outpacing the industry’s 10 percent gain, according to Autodata Corp., as fuel-efficient models like the Fiesta subcompact attracted buyers.
Profit Outlook
Profit excluding some items may have slipped to 44 cents a share, according to the average of 17 analysts’ estimates, from 48 cents a share a year earlier, when the Dearborn, Michigan- based automaker reported the biggest third-quarter profit in its 108-year history. While Ford has warned of higher commodity prices and development costs, Johnson predicts third-quarter profit of 49 cents.
“Ford is doing all the right things and they sure haven’t gotten any credit for it from the Street,” said Gary Bradshaw, a fund manager at Hodges Capital Management in Dallas, who recently purchased 50,000 shares below $10 to increase his Ford holding to 250,000 shares. “That’s ridiculously cheap for a company whose outlook is improving.”
Concerns about a double-dip recession and slowing economy have weighed on the automaker’s shares, which have fallen 25 percent this year through yesterday to $12.51. Ford gained 68 percent in 2010.
Mulally has focused on quality and fuel economy to boost sales. The three-month period through September may be Ford’s 10th straight profitable quarter. From 2006 through 2008, Ford’s losses totaled $30.1 billion as a collapse in sport-utility vehicle sales was followed by the most severe recession since the Great Depression.
Borrowed Big
The automaker borrowed $23.4 billion in late 2006 after Mulally arrived from Boeing Co. Ford put up all major assets including its blue oval logo as collateral, helping it avoid the bankruptcies and bailouts that befell the predecessors of General Motors Co. (GM) and Chrysler Group LLC, which is now majority owned by Fiat SpA. (F)
Ford shares gained 4.1 percent last week after the UAW said Oct. 19 that Ford’s U.S. hourly workers voted 63 percent in favor of a new contract. Increased labor costs under the deal, which doesn’t give raises to senior workers and promises 12,000 new jobs by 2015, will eventually be offset by greater manufacturing efficiencies, Mark Fields, Ford’s president of the Americas, told analysts Oct. 20.
Ratings Upgrades
Standard & Poor’s raised Ford’s credit rating two levels to BB+, the highest non-investment grade, on Oct. 21, saying the new contract will not impede profitability or cash generation. Fitch Ratings upgraded Ford to BB+ from BB on Oct. 20, and assigned a positive outlook. Moody’s Investors Service also has said it is reviewing ratings on the automaker, which fell to so- called junk status six years ago.
Ford had said it wouldn’t pay a dividend until it returned to investment-grade ratings. That position changed last month.
“Our shareholders have been very patient,” Booth, the finance chief, said last week on a conference call about the contract.
Share-price growth is more important that restoring the dividend, Bradshaw said.
“I want the stock to double over the next two or three years,” Bradshaw said. “That’s how we’ll make our money on Ford. The dividend is secondary.”
Rising sales of Ford’s sport utility-vehicles, up 19 percent this year, may push third-quarter profit higher than most estimates, said Efriam Levy, equity analyst with Standard & Poor’s Capital IQ in New York. SUVs carry higher profit margins.
Upside Potential
“They’re doing very well in North America,” Levy, who rates Ford a “buy” and predicts 50 cents per share in third- quarter earnings, said in an interview. “I’m looking for automotive sales to rise about 10.5 percent. Their sales mix is weighted toward utilities, which I consider a plus.”
Ford sales in the third quarter may have expanded to $30.5 billion, from $29.9 billion a year ago, the average of 11 analysts. The cost of commodities such as steel and the cost of developing new models may not increase by the full $4 billion Ford had warned earlier this year, Levy said.
“There has been some easing of some commodity costs,” Levy said. “I’m looking for higher profits.”
read more: Olympus Wealth Management
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