Due to the pandemic, Ford (NASDAQ: F) suspended its dividend two years ago but reinstated it last fall in the belief that it could return shareholders’ money while also making necessary investments, such as EVs.
Because of the pandemic, General Motors (GM) has decided to delay its dividends for two quarters in 2020. For both companies, stock buybacks have been minimal.
Morningstar’s David Whiston feels that both firms have enough cash on hand to invest in EV development and other growth initiatives, as well as to pay a dividend or buy back shares. “However,” he adds, “they simply vary in how they intend to return cash to shareholders.
The dividend and repurchase policies of the major automakers provide an intriguing case study of how established businesses in developing sectors handle capital return to shareholders.
For a long time, Ford and GM were seen as dividend-paying cyclical equities. Ford and General Motors each paid out $2.4 billion in dividends in 2019. Of course, Tesla (TSLA) is also investing extensively in electric vehicles, but the company doesn’t distribute any dividends.
Developing these new technologies is a huge undertaking. It’s worth noting that Ford CEO James Farley announced earlier this year that the business will spend $5 billion on electric vehicles “just this year.” We’ll spend over $50 billion on electric vehicles and new technologies by 2026, he said.
Morgan Stanley’s global head of autos and shared mobility research, Adam Jonas, says that the legacy automakers find it “difficult to be a cash-return story” because that would be like saying, ‘Oh, we can take on Tesla and invent everything new, curb our core business, and have excess cash to return to shareholders.’
How did General Motors (NASDAQ: GM) CEO Mary Barra, in February, answer analysts’ questions about whether or not the automaker will reintroduce its dividend at that time?
“Our obvious aim is to accelerate our EV strategy and generate growth,” she added. “We want to keep maximum flexibility to spend when opportunities occur across our development platforms.
“We will evaluate all ways to return surplus money to shareholders,” Barra said before those statements. It was not a strong promise to the dividend, particularly a regular one since the corporation aims for the next generation of automobiles, including self-driving cars soon. This technology is being developed by the Cruise division of the corporation.
GM refused to comment on its dividend policy, citing Barra’s remarks from February as a reason for the company’s silence.
“More freedom and they aren’t reliant on the financial markets for cash—or less dependent,” says Sarat Sethi, managing partner at investment advice company DCLA, which owns GM shares. Sethi:
As a result, “they are indicating to their investors and competition that they are dedicated to expanding the firm and believe that reinvestment prospects are bigger than dividend expenditure,” he says.
“At least in normal form,” Whiston says he doesn’t anticipate General Motors to return its dividend right now, referring to a quarterly payment. He believes that paying a special dividend from time to time is a more feasible prospect.
This is in stark contrast to the 15 cents a share Ford gave out before the outbreak, which was reinstated in October of last year. CFO John Lawler indicated at the time that the firm was able to support its expansion ambitions and that it was not hampered by a lack of cash.
According to Lawler, “We’re optimistic that things can be funded, and we’re focused on overall shareholder returns—not just stock gains, but also dividends.”
Company representatives were unable to respond.
The fundamental differences between Ford and GM’s shareholders are a major factor in their different practices. As part of the company’s dual-class share structure, the Ford family holds a very tiny portion yet wields 40% of the voting power in the company’s stock.
Morningstar’s Whiston believes that the Ford family “wants to be paid,” alluding to the dividend. It’s not my fault. If I were a member of the Ford clan, I’d expect a dividend as well. As a result, unlike GM, you won’t notice a drop in the dividend.
Ford said earlier this year that “this [dual-class] structure also guarantees that the Company has a robust and loyal investor base during economic downturns and crises” while discussing its annual meeting and proxy statement.
General Motors, on the other hand, does not have a significant part in the firm owned by a single-family.
Jonas agrees that the Ford family’s interest in the company’s dividend narrative is critical to its success. According to him, the firm’s return to dividends in the autumn of last year was an excellent illustration of how a company may communicate its confidence in the market.
When the stock’s dividend was reinstated, “that was a signal they wanted to convey; they certainly believed they were in a position to send,” says Jonas.
Following the declaration of a dividend, the stock price jumped in response to the news. However, it has taken a beating in recent months, with a year-to-date return of around negative 41%. The stock had a recent yield of 3.3 percent when we last looked at it.
This is not the first time that General Motors shares have taken a beating. To make matters worse, there is no dividend yield on this company.