Ford boosts its dividend by 20%

(source: Barron's Jan 8,15) Ford’s stock went nowhere in 2014 but a higher dividend and cheap valuation point to gains this year.

• a quarterly dividend of 15 cents a share on March 2, 15
• Div/yield 0.15/3.91
• ex-dividend date will be on January 28, 2015, with the record date on January 30, 2015, and dividend payout date of March 2, 2015.

Will Ford’s dented shares shift to a higher gear? We think so, especially after the U.S. auto giant said it would boost its dividend by 20%.

Before Thursday’s opening bell, Ford Motor (ticker: F) said it would pay a quarterly dividend of 15 cents a share on March 2, up from its previous per-share payout of 12.5 cents. Based on the current stock price, Ford’s yield would be 3.9%, up from a current 3.4%.

Sterne Agee analyst Michael Ward sees the stock, which trades at 9.6 times estimated 2015 earnings, hitting $20 by this time next year. Ford was recently 1.6% higher to $15.28.

Today’s dividend hike marks the third time in as many years that Ford has sweetened the quarterly payout it reinstated in 2012. But what is most notable is that it comes after a year in which revenue and profit fell, even as the broader U.S. auto industry had its strongest year of sales since 2006.

Granted, plunging gas prices have increased demand for trucks and SUVs, an area where Ford is strong. But in a Sept. 29 investor meeting, CEO Mark Fields, after just three months on the job, slashed the company’s 2014 forecast due to rising trouble in emerging auto markets and costs from quality troubles and U.S. recalls. The nation’s second-largest auto maker by sales expects pretax profit for 2014 to total $6 billion, or roughly $1.5 billion less than it predicted in July.

Wall Street expects Ford to earn $1.12 per share in 2014, down from $1.62 the previous year, as revenue is seen falling 1.7% to $137 billion. The company reports fourth-quarter earnings on Jan. 29.

The stock, meanwhile, has dropped more than 15% since it hit a multiyear high of $18.12 in late July.

But an ugly 2014 is expected to give way to better growth ahead, with the Street forecasting per-share earnings of $1.61 for 2015 on revenue of more than $146 billion.

For the past several years, Ford has invested billions of dollars to develop more fuel-efficient vehicles. That push may seem unnecessary given the drastic drop in oil and gasoline prices, yet Ford remains committed to the plan, which includes redesigning its best-selling F-150 pickup truck into a lighter-weight, aluminum-bodied model.

But as Barron’s Jack Hough argued last year, there is more to the bull case than the redesigned F-150 that Ford began delivering last month (see Feature, “Ford’s Shares Could Climb 30%,” Nov. 15, 2014). Ford launched close to two dozen new vehicle models worldwide in 2014, positioning it to reclaim lost market share. The company is cutting costs. And as losses shrink in Europe and market share in China grows, international operations could turn a profit next year.

Fields is shaking up sales and marketing in the U.S. with new appointments, and reducing low-margin vehicle sales to car rental companies.

And after spending $35 billion between 2009 and 2013 to reduce debt, strengthen its balance sheet and bolster underfunded pensions, Ford is now expected to start skewing its cash allocation to increasingly favor shareholders.

Sterne Agee’s Ward expects Ford to spend $15 billion in the next half-decade on debt reduction and pensions, and spend twice that sum on dividends and share buybacks.

However, as the auto business is cyclical, sales and profits can fall quickly during downturns. More recalls could prove devastating, and investors will be keeping a close eye on sales of the redesigned F-150.

Still, at its current valuation, and dividend hikes in store, it’s time for investors to not just kick the tires but to buy the stock.