Strikes, emerging technologies, and increased competition continuously hinder the stock performance of Ford Motor and General Motors, the last two traditional North American auto makers. However, despite these challenges, there is a viable strategy to enhance shareholder returns that doesn’t necessarily involve designing the next groundbreaking electric vehicle. In fact, both companies have the financial capacity to provide higher dividends to their shareholders.
Fain’s critique does hold some merit: both Ford and GM do pay dividends, which is not uncommon for mature companies. However, it’s important to consider that in recent years, these companies have distributed less cash compared to the previous labor contract due to the impact of the Covid-19 pandemic. In 2020, both companies suspended dividend payments amidst the global turmoil. Ford, however, resumed its quarterly dividend in 2021 at pre-pandemic levels, while GM reinstated its payouts in 2022, albeit with a reduction from 38 cents per share to nine cents.
GM has maintained a more conservative approach for quite some time. Between 2019 and 2022, the company spent approximately $3.6 billion in total on dividends—significantly less than the $9 billion it allocated between 2015 and 2018. Similarly, Ford’s cumulative dividend expenditure between 2019 and 2022 amounted to around $5.4 billion, which is less than half of the $11.2 billion it distributed between 2015 and 2018.
GM and Ford’s Dividend Potential
Both GM and Ford have shown strong financial performance in recent years. GM generated an impressive $34 billion in adjusted free cash flow from 2019 to 2022, compared to $29 billion from 2015 to 2018. During the most recent four-year period, GM paid out only 11% of its adjusted free cash flow as dividends, a significant decrease from the prior four-year span when it paid out 32%. In comparison, the average ratio for S&P 500 companies is around 50%.
Ford also fared well, generating $38 billion in adjusted free cash flow between 2019 and 2022, with 14% of that amount paid out as dividends. From 2015 to 2018, Ford generated $40 billion in free cash flow, paying out 28% as dividends.
Looking ahead, Wall Street predicts some slight profit decline for both companies, primarily due to the expected moderation of new car prices after the pandemic-induced highs. However, this change is not expected to be substantial.
In simpler terms, GM and Ford have the potential to offer larger dividends, even if they never reach the levels of other mature companies that pay out 60% or 70% of their adjusted free cash flow. However, caution is necessary because of the challenging and cyclical nature of the auto industry.
If GM were to return to its previous quarterly dividend rate of 38 cents per share, its stock multiple could increase from approximately five times earnings to approximately seven times, which is similar to Ford’s trading multiple. This improvement represents a roughly 40% increase from recent levels. With an estimated 2024 earnings multiple of seven times, GM stock would be valued at approximately $47 per share and yield about 3% based on the larger dividend payout. Currently, GM shares yield 1.1%. Similarly, if Ford increased its quarterly dividend payout to 16 cents per share, the stock could rise to around $21, a 65% jump. This would result in a yield of approximately 3%.
To achieve these numbers, stable cash flows are necessary once the current labor deals are finalized. With careful management, both companies can satisfy both their workers and investors alike.