are in the same business and are based in the same state. But they couldn’t be more different when it comes to their dividend policies.
(ticker: F) reinstated its dividend last fall after suspending it more than two years ago when the pandemic first struck, confident that it can return capital to shareholders and make the necessary investments in its future, notably electric vehicles, or EVs.
But General Motors (GM), which suspended its dividend in the second quarter of 2020 due to the pandemic, isn’t showing any signs of bringing it back. Neither company has been buying back much stock.
David Whiston, an equity analyst at Morningstar, says he believes both companies have the necessary funds to spend on developing EVs and pursuing other growth projects—and pay a dividend or buy back shares. “But they just differ in how they are going to return cash to shareholders,” he says.
The auto makers’ divergent dividend and buyback policies, then, offer an interesting case study in how mature companies in evolving industries are approaching capital return to shareholders.
For many years,
and GM were regarded as traditional cyclical stocks that paid a dividend. In 2019, Ford and GM each paid out roughly $2.4 billion in dividends.
(TSLA), of course, is spending heavily on EVs as well, but it doesn’t pay a dividend.
The costs of developing these new technologies are enormous. For example, on a conference call in March, Ford CEO James Farley said the company planned to invest $5 billion “in EVs just this year.” And by 2026, he added, “we’ll have invested over $50 billion in EVs and new technology development.”
For the legacy auto makers, says Adam Jonas, global head of autos and shared mobility research at Morgan Stanley, “it’s hard to be a cash-return story because then it’s like saying, ‘Oh, we can take on Tesla, invent everything new, curb our core business, and have excess cash to return to shareholders.’ ”
Consider how GM CEO Mary Barra approached the topic during the company’s first-quarter earnings call in February, when she told analysts that the auto maker wasn’t going to reinstate the dividend at that time.
“Our clear priority is to accelerate our EV plan and drive growth, and we want to maintain maximum flexibility to invest as opportunities arise across our growth platforms,” she said.
Barra did preface those remarks by saying that “we will consider all opportunities to return excess capital to shareholders.” But it was hardly a firm commitment to the dividend, especially a regular one, as the company sets its sights on the next generation of autos, including autonomous driving vehicles. The company’s Cruise segment is developing that technology.
General Motors declined to comment on its dividend policy, pointing to Barra’s comments in February.
Sarat Sethi, managing partner at investment advisory firm DCLA, which holds GM shares, says the auto maker’s dividend policy gives it “more flexibility and they aren’t dependent on the capital markets for capital—or less dependent.”
At the same time, he adds, “they are signaling to their investors and competitors that they are committed to growing the company and feel the opportunities are greater in reinvestment than a dividend outlay.”
Whiston says he doesn’t expect to see General Motors bring its dividend back right now “at least in regular form,” referring to a quarterly disbursement. He thinks a more realistic possibility is for the company to pay a special dividend on occasion.
Ford, in contrast, announced last October that it would reinstate its quarterly dividend at 10 cents share, below the 15 cents a share it paid out before the pandemic. Chief Financial Officer John Lawler said at that time that the company had the financial means to fund its growth initiatives and that it wasn’t capital-constrained.
“We’re confident that we can fund those, and we’re focused on total shareholder returns—not only stock appreciation but also the dividend,” Lawler said.
The company couldn’t be reached for comment.
One important consideration in the disparate policies: There is a structural difference between the shareholder composition of Ford and General Motors. The Ford family owns a small percentage of the company’s stock, but those shares represent 40% of the voting power in what is a dual-class share structure.
“I do think the Ford family wants to get paid,” says Morningstar’s Whiston, referring to the dividend. “I don’t blame them. I would want a dividend too if I was part of the Ford family. But for that reason, you’re not going to see the dividend go away like GM’s.”
In a filing earlier this year related to its annual meeting and proxy statement, Ford noted that “this [dual-class] structure also ensures that the Company has a solid and loyal investor base throughout economic downturns and crises.”
General Motors, in contrast, doesn’t have a family owing an important stake of the company.
Jonas concurs that the Ford family’s stake is an important element of the company’s dividend story. Ford’s dividend reinstatement last fall, he says, was a good example of a company signaling its confidence in the business prospects to the market.
It “was a signal they wanted to send; they obviously felt they were in a position to send it,” says Jonas, adding that it made the stock eligible again for dividend stock funds.
The market liked what it heard, and the stock rallied following the dividend announcement. But it has taken a drubbing amid a broad market rout in recent months, having returned about minus 41% this year through June 14. The stock was recently yielding 3.3%.
Shares of General Motors have taken a big hit as well, down about 43% over that period. And the stock has no yield to lessen the market hit.
Write to Lawrence C. Strauss at [email protected]