Ford Motor did what anyone would do when staring at a dramatic loss in cash flow. It took a step back and aimed to keep as much money in its pocket as possible.
Ford announced Thursday that, among other moves, it would suspend its quarterly dividend payments to shareholders. The dividend represents an annual cost of $2.4 billion to the Dearborn-based auto maker.
The most recent quarterly dividend payout was 15 cents per share, which was last paid March 2. Thursday’s announcement did not specify for how long the dividend would be suspended.
Wild swings on the stock market drove up prices overall on Thursday, while Ford closed at $4.47 a share, down 3 cents or 0.67%.
Ford’s stock price has fallen precipitously in just the past month. Ford has plunged by about 50% since it closed at $9.18 a share on Feb. 4.
The Dow Jones Industrial Average closed at 20,087.19 points, up 188.27 points or 0.95% on Thursday.
General Motors closed at $17.71 a share on Thursday, up 91 cents a share or up 5.42%.
Ford made a series of moves Thursday reflecting the ever dimmer outlook for the company and auto sales in 2020, given a long list of temporary shutdowns in the U.S. economy that are being engineered to combat the coronavirus crisis.
The Detroit Three automakers put a halt to car and truck production in North America through March 30 to clean its facilities and protect workers.
On Thursday, Ford also withdrew the earnings guidance that was given to investors a just a little more than a month ago.
“Like we did in the Great Recession, Ford is managing through the coronavirus crisis in a way that safeguards our business, our workforce, our customers and our dealers during this vital period,” said Ford CEO Jim Hackett in a statement.
Wall Street is watching as many companies will have to cut their dividends, given the increasing threat of a recession in 2020.
Analysts knew early in the game that a long list of companies, including Ford, are already paying out as much in dividends or more than they’re earning each year. Such companies are viewed as vulnerable to a dividend cut.
David Sowerby, managing director and portfolio manager for Cleveland-based Ancora Advisors, said a dividend cut is necessary when a downturn is on the horizon.
Sales in the auto industry can tumble quickly, as people face layoffs and those who don’t lose their jobs fear spending money on big purchases.
Concerns about a potential credit crunch as a result of the economic upheaval associated with the coronavirus crisis don’t help. A freeze in credit markets would hurt the auto lending environment.
“For cyclical companies, this is often the game plan in periods of business weakness,” Sowerby said. “All in the effort of maintaining the balance sheet when cash flow is under pressure.”
As part of its announcement, Ford said Thursday that it notified lenders that it will borrow $15.4 billion in unused amounts against two credit lines.
The added cash will offset the impacts of the coronavirus-related production shutdowns and give Ford more financial flexibility.
“While we obviously didn’t foresee the coronavirus pandemic, we have maintained a strong balance sheet and ample liquidity so that we could weather economic uncertainty and continue to invest in our future,” Hackett said in the statement.
David Kudla, CEO of Mainstay Capital Management, said Ford and other auto manufacturers were significantly affected by the temporary suspension of operations at factories in North America. And a dividend cut, he said, was expected.
“We are seeing similar corporate actions from other companies, and expect more to come,” Kudla said.
“The dividend cut at Ford will keep $2.4 billion per year on the balance sheet.”
Robert Bilkie, CEO of Sigma Investment Counselors in Northville, agreed that the dividend cut was expected in recent days.
“The market was telegraphing the cut with the huge drop in price,” Bilkie said. “It’s too late to sell Ford now, I believe.”
Bilkie said investors can expect more dividend cuts ahead at other companies, especially at companies that depend heavily on sales to consumers.
“I think many companies may be trimming their dividends until the fog clears, just to conserve cash,” Bilkie said.
David Whiston, equity strategist tracking U.S. autos for Morningstar Research Services, said the dividend cut is disappointing to investors.
But he said it’s “not shocking given how bad things are now.”
“If virus fears abate soon, I could see the dividend coming back as soon as this year,” Whiston said.
“But right now there’s no visibility on anything industrywide because no one knows how long the virus fears remain this bad.”
Ford has maxed out on its credit lines, so they will have a massive cash amount to weather the storm, he said.
“But there’s no good news coming from anything in U.S. autos through at least April,” Whiston said.
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