The Ford dividend has climbed above 7%. That’s a high yield… but I don’t plan on buying shares of Ford. My in-depth research below shows that Ford’s dividend isn’t safe. Taking it one step further, margin traders might want to consider shorting Ford.
Side Note: Here’s a better buying opportunity… I locked in a 7.46% dividend yield on this company. The risk-to-reward is so enticing that the position makes up 10% of my portfolio.
To start, let’s review Ford’s dividend history. It shows past payout behavior and it’s one of the best predictors we have for future performance. Next, we’ll dig into the auto sales trends, car loans, interest rates and other headwinds. You’ll soon see that Ford’s cash flow is under pressure and a dividend cut is probable in the next 12 months.
Ford Dividend History is Long… but Choppy
Ford has a history of cutting its dividend. Since 1980, the company has cut its dividend four times. The chart below shows the historical dividend per share…
This is a bad sign for dividend investors. Although, with this data alone, it’s hard to predict Ford’s dividend safety. Pairing the dividend history with the next trend gives better insight. The next trend has been a strong predictor of Ford dividend cuts…
U.S. Total Auto Sales Trend
Ford is the leading car brand in the U.S. based on vehicle sales. The chart below shows the total vehicle sales trend in the U.S.
The vehicle industry is cyclical and the red circles show when Ford cut its dividend. All four times, vehicle sales growth was negative.
In the recent bull market, vehicle sales have almost doubled since the worst of the 2008-2009 financial crisis. Although, over the last few years, vehicle sales growth has stalled. I predict vehicle sales to drop over the next year and the Ford dividend will follow.
U.S. Auto Loans Climb with Subprime Lending
Easy lending has helped push vehicle sales higher. As a result, total U.S. vehicle loans have climbed from $800 billion to almost $1.2 trillion in the last 10 years…
A good chunk of that growth comes from subprime lending… but it isn’t sustainable.
In Q3 2018, subprime lending was up about 10% year over year. It was the largest percentage increase out of five credit-score ranges… although, these bad loans are starting to default. The delinquency rate on subprime borrowers has climbed above 16% in the last few years.
This is another bad sign for Ford dividend investors. A large portion of its business is a financing segment. It entices vehicle buyers with cheap credit to boost sales. As a result, Ford’s total loan portfolio topped $46 billion in 2018.
Climbing Interest Rates Lower Vehicle Sales
Interest rates are near an all-time low and have fueled vehicle sales… but interest rates are on their way up again. The climbing rates are making borrowing more expensive. It’s pushing potential car buyers away.
The reversal of low rates and easy lending are the main factors working Ford. Although, there are more headwinds…
- Tariffs could increase U.S. light duty vehicle prices by an average of $2,750. That could lead to an annual sales drop of 1.3 million units.
- Vehicle Repossession Orders more than doubled from last year and reached 360,000. All of these cars hitting the resell market could lower new car sales and prices.
- Average Car Lifespan is more than 11 years and that’s up from 8.4 years in 1995. This increase puts downward pressure on new car sales.
- Automation is now leading to fewer cars on the roads. The average household vehicle ownership peaked in 2006 at 2.05. This number has trended downward since and ride sharing like Uber will push car ownership even lower.
Side Note: Automation is one of three powerful trends leading to a new economic paradigm. These three trends are working hand-in-hand and leading to one outcome: Universal Basic Income.
Is Ford’s Dividend Safe?
Ford is in a tough spot on many fronts… but will its dividend be safe during the coming downturn? Let’s dig into some of the company’s key financial data.
To start, the dividend payout ratio of 65% looks good (just like a car with a fresh coat of paint). Although, when we look under the hood, there are some problems. The auto industry is debt intensive and Ford has over $150 billion in debt…
Ford’s debt interest and repayment eat into its ability to pay dividends. The company’s free cash flow has already dropped from $11 billion in 2017 to $7 billion in 2018. And this year, cash flow is projected to drop further.
Paying debt takes priority over dividends. There’s also added pressure from upcoming R&D spending. Ford expects to invest $15 billion into electrified and autonomous vehicles by 2023. This is a vital move if Ford wants to stay relevant long-term.
Conclusion on Investing in Ford
Many investors are aware of Ford’s struggles. As a result, they’ve pushed the share price from about $18 in 2014 to below $9. This drop piques the interest of value, dividend investors.
The Ford dividend now shows a high-yield of 7%… but after a closer look, I’m hesitant to invest in shares of Ford. The company is as American as apple pie… but I’ll stick to the apple pie after seeing key trends and the current valuation.
P.S.There are better dividend stocks available. Two of these 3 Consumer Staple Stocks pay solid dividends and still trade near historically low values.