By Al Root
Auto makers looking to boost their stock returns might want to consider a fresh approach to dividend management.
Ford Motor and General Motors have had weak stock returns over time. Ford has returned about 3% a year on average for the past 10 years, counting dividends. GM has returned about 4%. Investors in the S&P 500 index have enjoyed total returns of 12% a year over that span.
All of Ford's returns came from reinvested dividends. Its stock price, at about $12, is lower than it was in February 2014. For GM, about 75% of its returns came from reinvested dividends. Its stock, at about $40, is up about 10% over that period. (It was below $27 as recently as November.)
Valuations aren't much better. Ford stock trades at about 6.7 times estimated 2024 earnings, while GM shares trade for about 4.5 times. The S&P 500 trades for closer to 24 times.
The stock market is the ultimate arbiter of success, but the companies' results have been better than those returns and multiples imply. Ford has generated some $100 billion in free cash over the past decade. The number for GM is about $75 billion.
Getting valuation multiples -- and stock prices -- higher has proven difficult. Great new cars and electric vehicles would help, of course. But the hard part is convincing investors that the car business is a growth industry again.
A simpler solution might be a better dividend payout framework.
Ford may be on the right track. It has committed to paying out 40% to 50% of its annual free cash flow with a mix of regular and special dividends. Quarterly dividend payments have amounted to about 20% of free cash flow over the past two years. Two special dividends account for about 28% of its free cash flow.
It might be why Ford stock trades at a higher price/earnings ratio than GM stock. Ford stock yields almost 5%. GM stock yields about 1.2%. If Ford traded at a GM-like multiple, the yield would be more than 7%. The average yield for an S&P 500 company paying a dividend is about 2.5%.
GM returns capital to shareholders too, but it favors stock repurchases over dividends. It has spent about $23 billion on share repurchases over the past 10 years and about $16 billion in dividend payments.
That might not be the best approach. Trivariate Research founder Adam Parker argues that "buybacks, in aggregate, have been a waste of capital." That flies in the face of conventional wisdom, which says a buyback is essentially just a tax-efficient dividend.
Practical wisdom doesn't seem to line up with conventional thinking. Excepting the past few months, GM stock was stagnant for 10 years despite shares outstanding falling from roughly 1.6 billion to less than 1.2 billion.
Academics might simply say the stock would have done worse if not for buybacks. Parker, for his part, finds that share count reductions simply don't equate to larger-than-average stock price gains. "Deploying capital elsewhere, on average, would have been more prudent," he wrote.
European investors are used to variable dividends. Mercedes-Benz Group, BMW, Volkswagen, and Stellantis shares have earned investors a respectable average of about 9% a year for the past decade. About 55% of the return came from dividends.
Freedom Capital Markets analyst Mike Ward suggests a step beyond variable dividends. He argues that Ford and GM should set aside a percentage of their cash flow into a separate account dedicated to paying regular dividends. "The more it builds, the more protection it provides," he says. "I've always believed a secure dividend would provide downside [valuation] support."
Ford and GM declined to comment on Ward's idea. Nevertheless, a greater focus on dividends could help both stocks in the long run.
Write to Al Root at allen.root@dowjones.com
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(END) Dow Jones Newswires
February 23, 2024 21:30 ET (02:30 GMT)
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