From Standard & Poor's Equity ResearchIn another move to conserve cash while it tries to turn its operations around, Ford Motor (F
) lopped its quarterly dividend in half on July 13, from 10 cents a share to 5 cents. The surprise announcement reduces the annualized dividend yield to less than 3%, which should enhance Ford's liquidity by about $90 million per year.
While the total annual cash savings alone is not very meaningful for such a large company, at least it is an outlay the auto maker can control—and it could presage other cost-saving actions. Indeed, Ford's directors also agreed to a reduction in their fees along with the dividend cut.
DISAPPOINTMENT. Ford faces challenges, in our view, from intense competition, lower market share, excess capacity, high gas prices, and rising legacy pension and health-care costs. Its financial services segment has been an important contributor to recent sales and earnings, but we expect its income to decline. We estimate that the addition of facilities from Visteon will hurt margins until operations can be significantly improved, shut, or sold.
Pension and other retiree benefit expenses should increase in 2006, but Ford does not anticipate required pension fund payments before 2009. We believe that the most recent contract with the UAW will enhance productivity by allowing Ford to close several production plants.
For 2006, we expect operating EPS of 19 cents, compared to an adjusted $1.28 from continuing operations in 2005. The difference between our operating EPS projections and our S&P Core EPS estimates reflects pension adjustments.
FORD FOCUS. We were disappointed by Ford's January restructuring plan. We would have liked to see more cost-cutting and are wary of unfulfilled revenue goals. In our view, the company was only partially successful in its 2002 restructuring; lower volume and market share since then have contributed to overcapacity. In 2006, we expect the company to lose market share.
Overall, we believe the July 13 dividend action shows Ford's focus on shared effort—and sacrifice—by various constituencies as it works to improve performance. We maintain our 3 STARS (hold) ranking on the shares.