In 2005 Ford Motor Company’s debt was downgraded to junk. In September of the following year, the company suspended its dividend, saying it would be resumed when the company’s debt returned to investment grade status.
They didn’t wait that long. In October the company’s debt was upgraded to one notch below investment grade. And last week it reinstated its quarterly dividend; the payout will be 5 cents per share, and begins in March. Ford’s CEO believes it is “sustainable”.
The move is a signal of confidence. And its not unjustified confidence. Ford made it through tough times: from 2006 to 2008, the company lost -$30.1 billion. Since then, the company has seen ten consecutive profitable quarters…and was the only one of the three Detroit automakers to avoid bankruptcy and a government bailout during the financial crisis. Over the last two years the company has repaid $21 billion in debt (and is sitting on close to $21 billion in cash and securities as of September). The stock gained 68% last year.
But reality is harsh today. While a dividend is an attraction, the stock is still down 34% year-to-date. And while Ford is “hardly languishing in junk bond hell”, as the Globe and Mail put it, the jump from junk to investment grade is really more like a big leap. The bottom line is that while the company may be looking up, the stock isn’t. Shares are in a well established long-term downward trend, and the stock is a long-term sell. I can’t look on last week’s announcement as a reason to buy.