Test Driving Ford's Dividend

After a long and difficult journey, Ford Motor Company appears to be on the road to recovery. It was only five years ago that the future of America’s iconic auto maker was very much in doubt. Soon, however, Ford will be issuing its first dividend since it suspended the practice in 2006—when the company needed to conserve cash in the face of steadily declining sales and potential bankruptcy.

Though modest at first, Ford’s five-cents-a-share dividend, set to take effect in March, 2012, is a major step in the restoration of Ford stock to investment-grade level. Although lower than some industry analysts had hoped, Ford stands by the nickel dividend amount as a way to guarantee that the dividend is sustainable over time, even when the economy and auto sales hit those inevitable potholes.

Ford made the announcement on December 8, in the wake of its most recent earnings report. During the three month period that ended in September, the company posted $1.65 billion in profits, running its streak of profitability to 10 consecutive quarters. The company also negotiated a new four-year deal with the UAW, which resulted in a virtual wage freeze over the course of that period. That news was greeted with enthusiasm by ratings agencies, with Moody’s bumping Ford’s rating up to Ba1, one rung below investment-grade.

The jump to investment grade is highly significant, as without that designation most mutual funds and other institutions won’t touch a company’s stock. That tends to keep the price of the stock down, and makes an investment in the company less attractive to most market participants. Once the stock does enter the investment-grade arena, and more buyers come into the issue, the amount of the dividend could see a commensurate boost.

There’s significant disagreement among analysts as to the time frame in which the major ratings agencies will elevate Ford’s rating. Some see the dividend as accelerating that time frame to as soon as six months from now. Others see Ford’s ongoing, successful execution as the key to an upgrade, with the dividend having little or no bearing as to when that happens. That makes Ford a riskier dividend play than most, and perhaps more attractive to investors with a longer time frame.

With world economies undergoing unprecedented changes right now, it’s difficult to look into a crystal ball and say definitively that the Ford dividend is a great place to put your income-generating investment dollars. But it is an encouraging sign of the ongoing recovery in America’s auto industry, when just a few short years ago the very existence of that industry was very much on the brink. And, given the company’s comeback, current management seems capable of adding more value in the years ahead to a brand which used to be synonymous with American economic power.

According to Ford, the five-cent dividend will be paid March 1 to shareholders on record as of January 31.