When their cash-flow engines are firing on all cylinders, Ford Motor and General Motors pay out a steady and reliable stream of dividends—the type of performance income investors crave.
The Covid-19 pandemic, however, put a big dent in those cash flows earlier this year as both companies temporarily halted vehicle production in many plants. The result: Ford (ticker: F) suspended its quarterly dividend in mid-March, and General Motors (GM) did so in late April.
Auto makers are considered cyclical stocks, given how tethered they are to the direction of the overall economy—up, down, or in between. Their dividends aren’t bulletproof. But now, as 2021 approaches and with strong third-quarter results in their rearview mirrors, both companies appear to be on their way to restoring their dividends.
“If you look at the auto industry, it has always cut dividends early in a recession,” says Dave King, a portfolio manager at Columbia Threadneedle Investments who focuses on various income securities. “And when business gets better, the dividend is always restored.”
Ford previously suspended its dividend in 2006 amid a big restructuring plan aimed at cutting costs. The quarterly dividend wasn’t restored until 2012, at 5 cents a share. It was 15 cents a share when the company suspended it again in March.
GM eliminated its dividend in 2008 during the recession. It resumed paying a quarterly dividend of 30 cents a share in 2014. The payout stood at 38 cents a share when it was suspended in April.
So far, GM has been more specific about the timing of a dividend reinstatement. GM CEO Mary Barra told analysts on Nov. 5 that the company is looking at restoring the payout sometime in the middle of next year.
“If our current recovery continues, we anticipate reinstating a dividend at the appropriate level that balances various capital-allocation priorities, including our investments to accelerate EV,” Barra said, referring to electric vehicles—a crucial market GM is pursuing aggressively.
Ford, under new CEO James D. Farley, hasn’t yet given a detailed timeline for when it could resume its dividend. When asked in late October about the parameters for reinstating the dividend, CFO John Lawler told analysts that “I don’t think this is the time to have that discussion” and that the company needed to come up with a framework for its capital strategy “and where we’re headed as a business.”
Still, Ford and GM, which have both been increasing their production capacity, bounced back in the third quarter from dismal results three months earlier.
“Insatiable demand for large pickups and SUVs for both companies is really driving their results,” says Jason Petitte, an equity research analyst at Kovitz, an investment and wealth management firm based in Chicago.
Other tailwinds contributed to the strong quarter.
“Not only do you have a market that is showing a recovery, but because of a lack of inventory, GM and Ford were both able to show considerable increases in net prices,” says Brian Sponheimer, a portfolio manager at Gabelli Funds. “The sticker prices of vehicles were rising, and incentives needed to sell those vehicles declined sharply.”
Ford reported third-quarter earnings of 65 cents a share, compared with losses of 35 cents and 23 cents in each of the previous two quarters. Adjusted free cash flow totaled $6.3 billion, versus minus $5.3 billion in the previous quarter, as production ramped up and payables to suppliers rose. When, for example, payables increase from one quarter to the next, they are considered a source of cash. There is no cash outlay in that period for the receivables increase.
GM swung to a third-quarter profit of $2.83 a share, a big improvement from its loss of 50 cents a share in the prior three-month period. The company generated $9.1 billion of free cash flow in the quarter, about the same amount it burned through in the second quarter.
For the auto makers, shutting down production had many deleterious effects, including the cash burn.
In such a scenario, there’s a “double whammy because you lose your earnings by not producing and selling vehicles, and you also have these bills that are due that you have to pay from the prior production” of vehicles, says Itay Michaeli, who covers the automotive industry for Citi.
But with production back online, that cash crunch reverses. “You are collecting [cash] faster than what you are paying to the suppliers,” says Michaeli.
And that’s when dividend reinstatements become a possibility.
But while Sponheimer of Gabelli Funds expects both Ford and GM to restore their dividends, he asks whether it matters. “The better question is, does the market truly value that?”
Pointing to Tesla (TSLA), whose stock is up more than 500% this year, he observes that “the market is saying that the value is in the growth of electric vehicles, not necessarily a commitment to a quarterly dividend.”
Still, Michaeli is upbeat about the automotive industry’s prospects—and improving prospects should cheer income investors hungry for GM and Ford to restore their payouts.
“We actually think that coming out of the downturn, there is a pretty strong case to be made that U.S. auto demand could reach upwards of 18 million units” a year, he says, adding that the prior peak was close to 17 million units.
Michaeli says that “Ford has a longer list of to-dos to fix parts of the business that are needed and to address other kinds of recent execution issues,” and that “GM already has done some of the restructuring actions and other [moves] to streamline their business.” For example, Europe remains a challenging place for Ford, but GM has exited that region.
Because of these dynamics, the stock market has been kinder to GM, whose stock has gained about 24% this year, compared with a 3% loss for Ford. Still, Ford has plenty of upside.
For now, the companies’ improving financials should bode well for the restoration of dividends, even though the timing remains uncertain.
A U-Turn for Dividends
Both companies suspended their dividends amid Covid-related pressure, but they’re on the road to return.
Data as of Nov. 23.
Sources: FactSet; Bloomberg
Write to Lawrence C. Strauss at [email protected]
