3 Automakers Providing Dividends Despite Market Concerns

David Whiston: 2019 U.S. light vehicle sales were healthy at 17.1 million, but sales have declined for two of the past three years, and we think they will decline again in 2020. Concerns of peak sales for this cycle have been an overhang on our U.S. autos coverage for a long time, which can make stock-price appreciation difficult. Dividends are a way to get paid to wait, and in our U.S. autos coverage we see 4-star rated Ford (F) and GM (GM), and slightly overvalued dealer Penske Automotive Group (PAG), as the best dividend-payers.

Let’s start with the highest dividend yield of the three, Ford, currently paying about 6.5%. Yields this high often come with dividends that are in jeopardy, but we don’t think so in this case. One important differentiator of Ford from most other large corporations is its family ownership. Its dual share class structure means the Ford family always has 40% voting control, but to us it also means the family wants to keep getting paid. Management has guided many times that the dividend can be maintained even if auto sales returned to the lows of 2009, which we think is highly unlikely to happen, partly because there are now about 20 million more licensed drivers in the U.S. than in 2009. As of Sept. 30, Ford had $22.3 billion of automotive cash and investments plus over $13 billion in availability on credit lines, so we see plenty of liquidity to keep servicing the annual dividend of about $2.4 billion. We think management is highly aware of the dividend’s importance to all shareholders, and would only cut or eliminate it in the direst of circumstances that we do not see happening.

GM, like Ford, has kept its dividend flat in recent years because it does not want to take it above a sustainable level in the next recession. The current yield of nearly 4.5%, which is about a $2.2 billion annual payout, is supported by GM’s automotive cash target of $18 billion plus unused credit lines of $16.5 billion at the end of the third quarter. The cash balance likely fell slightly below $18 billion at year-end 2019 due to the UAW strike, but we think GM can rebuild that balance to at least $18 billion, especially in the back half of 2020. In a recession, guidance is for adjusted automotive free cash flow burn of about $5 billion, which would be closer to $6 billion including the Cruise autonomous vehicle segment. That burn from say a starting point of $20 billion, close to GM’s actual cash at Sept. 30 of $20.7 billion, would still enable GM to stay far above its minimum cash to run the business that is likely near $8 billion based on past disclosures. So a recession cash burn would still leave GM with enough cash to pay its dividend even without touching its credit lines.

For investors that don’t like the capital-intensity of GM and Ford, premium luxury dealer Penske Automotive offers the highest dividend yield of the six public dealers with an annualized yield of nearly 3.5%, costing about $133 million a year. Management, led by Roger Penske, has increased its dividend for an impressive 34 straight quarters and it could keep that streak alive because the company targets a payout ratio of 30%-35% and is on track to do about 31% in 2019. Penske’s governance is similar to Ford, though Penske does not have supervoting shares. Roger Penske, through his control of privately held Penske Corporation, beneficially owns 42% of Penske Automotive and much like the Ford family, we think he wants to keep getting paid. The company also has $595 million available to borrow on a U.S. credit line and stayed free cash flow positive in 2009. It did not pay a dividend in 2009 or 2010, but we feel the next automotive downturn will be nowhere as severe as 2009’s 10.4 million units.