Ford’s Suspended Dividend Tests Family’s Patience With Hackett
Ford Suspends Dividend to Preserve Cash, Withdraws Guidance
(Bloomberg) -- Ford Motor Co.’s Chief Executive Officer Jim Hackett was already under pressure before the coronavirus pandemic upended economies worldwide. But after suspending the dividend payment that management had said was sacrosanct, he’s now testing the faith of the founding family that has supported him.
Executive Chairman Bill Ford has not been shy about stressing the importance of the stock and dividend to his clan. “Most of our net worth is tied up in the company,” he said at Ford’s 2017 annual shareholders meeting. A year later, he joked about his family’s keen interest in the dividend when reading a question from an investor.
“Why is the company so stingy with paying dividends?” Ford read during the webcast shareholder meeting. He quipped: “Was that sent in by a member of the Ford family?”
But now, with the automaker halting production at its North American factories after shutting plants in Europe earlier this week, Hackett said he has no choice but to conserve cash and offset a financial hit one analyst estimates will cost the company $1 billion in earnings before interest and taxes.
“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 a statement.
Bunker Mode
To give the company financial breathing room and keep important new model launches rolling, the automaker also is fully drawing down $15.4 billion from two credit lines and retracting earnings guidance it had given investors on Feb. 4.
“They maxed out their credit line, so they have well over $30 billion in cash now and that is a massive hoard,” said David Whiston, an analyst with Morningstar in Chicago. “That, along with the dividend suspension, basically puts Ford in lockdown mode. They’re going into their bunker.”
The unprecedented circumstances should buy Hackett some time and patience from the Ford family, which derived annual income of tens of millions a year from the 15-cent quarterly payout. While all common shareholders receive the dividend, the progeny of Henry Ford hold a special class of stock that gives them 40% voting control of the company.
Ford last suspended its dividend in 2006 before reinstating it five years later. That included a period when U.S. auto sales plunged to 10.4 million in 2009.
Stock Under Pressure
When Ford restored the payout, management pledged it had re-engineered the company so it could maintain the dividend through the next downturn.
“Ford has said many times, even before Hackett became CEO, that the dividend would be safe if sales went back to ‘09 levels,” Whiston said. “And even the lowest projections as of mid-March are not for ’09 levels in 2020.”
The dividend reversal puts even more pressure on Hackett, who has faced questions from Wall Street about his job security.
Ford shares fell as much as 8.9% shortly after the start of regular trading. The stock, which as of early this month had fallen further under Hackett than his predecessor, closed Wednesday at the lowest since April 2009.
Hackett, 64, took the steps to bulk up on cash hours before Ford planned to halt output at all North American factories through March 30 for deep cleaning. The shutdown will cost the company $1 billion in lost earnings before interest and taxes, Michael Ward, an analyst at Benchmark Co., estimated in a note to clients on Thursday.
Ford will lose the equivalent of 140,000 vehicles worth of production during the 11-day shutdown, or about $5.3 billion of revenue, he wrote. Ward lowered earnings estimates for the carmaker, which he rates a hold.
Analysts have speculated in the wake of the virus that factory closings and the global slowdown of vehicle purchases probably would force Ford management’s hand. Then-CFO Bob Shanks said in August 2018 that reports the dividend was at risk were “baseless.”
“The dividend’s been a legendary value creator at Ford,” Hackett said Feb. 4. “I want to continue that, because we said we could do it, and right now we can.”
Joseph Spak, an analyst at RBC Capital Markets, predicted a dividend cut last week, writing in a report that the $2.4 billion annual cost of the payments would be too much of a burden for a company that’s repeatedly come up short with its earnings and just issued a disappointing profit forecast for the year.
Heir Apparent
In an effort to change that negative dynamic, Hackett recently shook up management by appointing Jim Farley chief operating officer and gave him a mandate to accelerate an $11 billion restructuring. But credit-ratings companies have raised concerns about the efficacy of those efforts, with Moody’s Investors Service downgrading Ford to junk and S&P Global Ratings cutting the company to the lowest rung of investment grade rating last year.
Ford’s board of directors last week cemented Farley’s status as heir apparent to Hackett by disclosing it had arranged a $2.5 million stock award for the 57-year-old if he is not named the next CEO.
Bill Ford and his family have stood by Hackett through setbacks and struggles. And now they’re likely hoping this dividend suspension is short-lived.
“I would not be shocked if the dividend comes back as soon as this year,” Morningstar’s Whiston said. “But that’s certainly not a base-case expectation because we just don’t have visibility on anything in U.S. autos.”
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