It came as no surprise last week when one of our best ideas, Ford (F) reinstated its quarterly dividend. Though the dividend payable is only 5 cents a share, it amounts to a yield just shy of 2%. In total, the dividend should cost about $800 million in 2012, with plenty of room to grow in the future. However, the dividend does not affect our fair value estimate of the company, which we still assume to be at least $20.
A 2% dividend yield isn’t necessarily a reason to jump into any stock, but in the case of Ford, a 2% yield is great income for a stock that we think is worth almost double. Given the company’s inconsistent cash-flow generation over the past several years, it seems logical that Ford might struggle to pay it. However, with our forecast predicting the company to generate billions in free cash-flow over the next 5 years, the firm registers a relatively high score on the Valuentum Dividend Cushion. This implies sufficient operating success over the next several years, but more importantly, that the dividend is relatively safe.
Due to the credit upgrade and implementation of a dividend, shares have held up relatively well. The dividend should provide a near-term floor for the stock that wasn’t there before. We think downside is capped, unless there’s another cataclysmic event in
Auto sales have picked up steadily in October and November, and we are optimistic US domestic sales will exceed 14 million units next year. 14 million still isn’t enough to replace the current aging fleet, and the next several years should result in windfall profits for auto makers and their suppliers, in our opinion.