Ford (NYSE: F) just announced it will suspend its dividend. This shouldn’t a surprise to investors given the coronavirus, but is definitely a shock to the sector as a whole.
Why is all this a problem? Because the CDS markets are now pricing in a 45% chance that the automaker will fail. A day after the Big 3 factories closed amid the virus crash, Ford comes out with an 8K kitchen sink as he prepares to overcome the worsening economic situation in the United States (and around the world):
- $ 15.4 billion of additional cash on the balance sheet, drawn from two lines of credit
- Dividend suspension to conserve cash and provide additional flexibility in today’s environment
- Withdrawal of company guidance for 2020 financial performance
Is Ford Stock A Buy?
Most stocks are declining, so it is hard to find several opportunities. One of our readers asked is Ford stock (F) was a “buy” given the elimination of the dividend. The answer is “Maybe,” because I am not sure if it has reached a support level. It is definitely a stock to watch.
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Speaking of support level, I don’t think it would be unrealistic to see Ford stock between $2-$3. This might be overly bearish, but F traded in 2009 at below $2 per share.
Ford Stock is a good stock, once you consider the dividend and management. The obvious downside to it is that it is directly tied to the economy, and there is very little demand for cars. It will likely take a year or more for the demand to come back. The good news is that it is more likely to rebound faster than luxury car manufacturers.
According to Ford, they are taking a series of initiatives to configure Ford further to separate itself from its competitors.
“Like we did in the Great Recession, Ford is managing through the coronavirus crisis in a way that safeguards our business, our workforce, our customers and our dealers during this vital period,” said Ford CEO Jim Hackett.
“As America’s largest producer of vehicles and largest employer of autoworkers, we plan to emerge from this crisis as a stronger company that can be an engine for the recovery of the economy moving forward.”
Ford notified lenders that it would borrow the total unused amounts against two lines of credit: $ 13.4 billion under its corporate line of credit and $2 billion under its supplemental line of credit. The incremental cash from these loans will be used to offset the temporary impacts on working capital of coronavirus-related production closings and to preserve Ford’s financial flexibility.
“While we obviously didn’t foresee the coronavirus pandemic, we have maintained a strong balance sheet and ample liquidity so that we could weather economic uncertainty and continue to invest in our future,” Hackett said.
“Our Ford people are extremely resilient and motivated, and I’mI’m confident in the actions we are taking to navigate the current uncertainty while continuing to build toward the future.”
Ford has routinely outlined goals of having $20 billion in cash and $30 billion in liquidity on the way to an economic downturn. Those cash levels were $22 billion and $35 billion in 2019.
At the same time, Company announced that it suspended stock dividend, prioritizing short-term financial flexibility with continued investments in an ambitious series of new product launches in 2020 and long term initiatives.
Ford also said it is withdrawing the guidance it gave on February 4 for 2020 financial performance, which did not take into account the effects of the coronavirus, because of uncertainties in the business environment. The Ford will provide an update on the year when it announces first-quarter results, which are currently slated for April 28.
The Company this week announced plans to temporarily halt production at its plants in North America and Europe starting today. These actions were taken to protect the health and safety of employees and also respond to problems with the supply chain and other limitations. Ford will work with labor representatives to restart production safely and effectively in the coming weeks.
Hackett noted that China was the first country to face the coronavirus and is now emerging from the virus crisis, and demand is slowly coming back. This news about China’s recovery should be a source of optimism about the overall economic recovery as the virus declines, he said.