This Automaker is a Dividend Growth Stock
Jordan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Automakers are known for being cyclical companies with a lot of capital expenditures. This capital intensive industry brings big profits when the economy is on the rise, but profits can crater in a downturn.
Alas, the industry is changing. Ford (NYSE: F) is taking its losses in Europe, cutting back production in order to maintain minimum production and return to profitability. General Motors (NYSE: GM) is doing the same, sacrificing some to save the whole. This is very different from the way automakers acted in years prior, where they would endlessly and relentlessly compete with more cars to steal market share and erode profits for everyone.
A new dividend king
Ford recently became a leader in shareholder-friendly moves by announcing that it would increase its dividend to $.10 per share up from $.05 per share. This gives shareholders an immediate 3.3% yield vs. no dividend at General Motors and a mostly irrelevant 1.76% dividend from Toyota (NYSE: TM).
But the dividends won't stop there. I'm a believer that Ford will continue to increase its dividends faster than all other automakers, and certainly faster than most big industrial companies.
Here's why: The Ford family calls the shots.
The Fords might as well be Detroit's royal family. At Ford, the long line from the founder controls virtually all of the decisions at the company due to their 70 million shares of class B stock enabling them to control 40% of the Ford Motor board.
The Ford family never sells its stock holdings as selling would mean the family gives up control over the company. That simply won't happen.
If the Ford family sells class B shares outside the family, they are converted permanently to common stock. If family holds fewer than 60 million shares, the family loses more than a quarter of its voting power to control only 30% of the board forever.
In short, the family cannot and will not sell shares to raise cash, shares which makes up the overwhelming majority of its net worth, wealth, and income.
So the only way that the Ford family can generate an income from its holdings is...you guessed it, a growing dividend to investors. Mind you, for more than six years the Ford family had to forgo any and all income on their class B shares. In years leading up the the dividend cut to zero, Ford had paid out huge dividends. In fact, the company paid out a whopping $10 billion dividend in 2000 after years of 3%-4% dividend yields.
A board under control
The board at Ford can merely listen and respect the Ford family's wishes. Any desire for a higher dividend among the Ford family means that it will come to fruition. Remember, the Ford family essentially has complete control over who takes a seat on Ford's board. Voting against the wishes of the family is voting against a lucrative board position at one of the best-known brands around the world.
Look for Ford to increase its dividends proportionally with income. The company is expected to earn $1.40 per share in 2014, which more than covers its excellent $.40 annual dividend. As European losses are reined in and Ford gets back to profitability in the continent, the company could earn more than $1.70 per share in 2014. That puts the company in position to drive the dividend higher.
Let the Ford family work in favor of shareholders. Their interests should ensure that Ford once again becomes a dividend growth stock that can pay a consistent dividend that increases with each passing year.
Don't expect other automakers to keep the pace. General Motors will tie up excess cash repurchasing shares as the U.S. Treasury winds down its position while Toyota likely won't increase its dividend meaningfully after failing to increase its dividend payout ratio in line with the 30% expectations set in 2007.
If you're bullish on automakers and want to get paid to wait, Ford offers the most compelling dividend opportunity. Another dividend increase in 2014 would only serve as a catalyst to bring on more income funds, more shareholders, and higher share prices.
valuemagnet has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!