Don’t Be Fooled By Ford’s Low Payout Ratio

It wasn’t so long ago that Washington bailed out the U.S. auto industry. It financed $80 billion in loans to rescue General Motors (NYSE: GM) and Chrysler (NYSE: FCAU).

Ford (NYSE: F), on the other hand, did not rely on taxpayer dollars for survival – though it was certainly a beneficiary of a healthier auto industry.

With a 4.5% dividend yield, Ford may seem attractive to income investors. But, as we’ve seen, an appealing yield doesn’t always tell the whole story.

Let’s dig into the safety of that dividend.

A Record of Inconsistency

In the past, Ford vehicles had some serious safety issues. From the Pintos that blew up when rear-ended to the Explorer rollover scandal, Ford drivers haven’t been kept very secure.

Can shareholders who own the stock for its dividend feel as safe as they would if they were driving a Saab?

Probably not. Ford’s dividend history is about as good as its vehicles’ safety record.

The company cut its dividend three times between 2001 and 2006. It eliminated payouts completely by late 2006, even though it continued generating plenty of free cash flow – even into 2007.

By 2008, free cash flow had gone negative. But in 2009, Ford was generating more than $11 billion in free cash flow again – yet the company did not reinstate the dividend until 2012.

Since 2012, the dividend has steadily climbed, although it’s still lower than pre-recession levels.

Last year, Ford generated $9 billion in free cash flow while paying out just $2.4 billion in dividends. This low payout ratio of 27% leaves plenty of room to raise the dividend or, at the very least, maintain it at the current level.

While Ford’s free cash flow is projected to drop slightly in 2016, to a little over $6 billion, that’s still more than enough to pay the dividend.

I don’t think a dividend cut is imminent, but cash flow is headed in the wrong direction. Plus, the company has a record of cutting more than a high school burnout.