Fords Dividend Policy: 1994-2009

Fords Current Payout Policy: Ford currently doesnt pay any dividend to its shareholders and has not paid any dividend to shareholders since July 2006. This is mainly due to falling sales the company has been experiencing in recent years, especially in the current economic climate with sales of new cars down all over the world. The company also no longer pays dividends as the cash they save from not paying dividends can be used to invest in the company and in other projects.

Changes in Their Payout Policy in Recent Years: In general, firms wish to keep their level of dividend payout steady over time and hope to gradually increase the level of dividend over time. Firms do not wish to increase their dividend by a large amount rapidly because they will have to pay at least that level of dividend in the future, unless they want to cut dividends. If a firm increases their dividend by a large amount and then profits dont increase as much as they have hoped in the next period, the firm may have to cut dividends. Firms always try to avoid cutting dividends because it sends a bad signal to shareholders and to the market. It suggests that the firm is worried about future cash flows, and this slashes investors confidence in the firm. This is certainly the case with Ford. From 1994 to 2001, Fords dividend payout increased slowly. For example their dividend payout in January 1994 was 11.44c. In January 1996, this rose to 20.02c and by January 1999, their dividend payout was 26.32c. This sent a positive signal to investors and Fords share price increased gradually over the years from 12.94c in 1994 to 26.31c in January 2001. However, on October 31st 2001, Ford announced a dividend cut from 30c to 15c. The New York Times stated that the existing level of 30c could not be sustained and suggested the cut was because of losses in the previous quarters and worries about potential losses in the future: At the previous 30 cents, it was on track to cost Ford about $2.2 billion this year. Industry analysts had said the dividend cut at Ford was prudent and fully expected by the investor community. It follows the company's recent warning that it will post its second consecutive quarterly loss since the early 1990's when it releases its third-quarter financial results next week.1Investors, as expected, reacted very negatively to Fords announcement. On August 3rd 2001, less than 3 months before the dividend cut, their share price was $24.95. There was a leakage of the dividend cut before it happened as the share price fell in September, but it fell dramatically after the cut. By November 9th, the share price had fallen to $16.46. By the following August, it had fallen to $12.45, less than half the value of Ford stock a year before. This proves that the market reacted very negatively to Ford announcing its dividend cut and confidence in ford collapsed as doubts about future cash flows raged. On January 28th 2002, Ford cut its dividend again, this time from 15c to 10c. Again, the market reacted negatively to the cut. Five days before the cut, the share price was $16.66. The share price didnt fall dramatically after the announcement but

decreased gradually in the next few months and by the following August was at a price of $11.77... Ford announced a third dividend cut on July 31st 2006 when they halved their dividend payout from 10c to 5c. The New York Times reported some of the reasons for the cut: Cutting its quarterly dividend to 5 cents a share from 10 cents is expected to save Ford $376 million a year. Ford last cut its dividend in January 2002, when it announced its first overhaul plan. The company also said Thursday that it would save another $1 million a year by cutting in half the compensation of its 10 outside board members.2 Fords Chief Executive, William Clay Ford Jr. provided other reasons for the decision to cut dividends: ''In the face of increasing challenges, we will continue to look for other efficiencies and savings. The headwinds we faced at the beginning of 2006 have only become stronger, as consistently higher gasoline prices in the U.S. have caused consumer purchase preferences to shift away from S.U.V.'s and large trucks.'' 3 This proves that dividends were cut to help Ford save money and the fact they needed to save money suggests they were fearful of their future cash flows. As with Fords previous dividend cuts, its share price decreased after they announced the cut. On day alone, July 14th 2006 as stated in USA Today: Ford shares closed down 32 cents, or 4.7%, to $6.56 on the New York Stock Exchange.4 Ford have announced two stock splits (also known as scrip dividends) in the last fifteen years. Firstly, in July 1994, they announced a stock split of 2:1, so for every one share existing shareholders own in the company they received one extra share. Stock splits are good news from the point of view of shareholders because it increases the number of shares they own in the company and so increases their control. Unlike cash dividends, theres also no transaction costs associated with stock splits. For Ford, stock splits are favourable because they may pay scrip dividends instead of cash dividends and so with the cash they save from not paying cash dividends, they can invest in further investments and projects. Agency costs are a problem in some way for all companies. This is where the objectives of shareholders conflict with the managers of a company. Shareholders wish to maximise their own wealth while sometimes managers may wish to invest in safe projects with a negative net present value. The more shareholders there are the less control shareholders have over managers and the bigger the agency costs. So with a stock split, existing shareholders have more control over managers actions and agency costs should fall. Usually, after a company announces stock splits, the companys share price falls, and this was the case when Fords stock split was announced as the New York Times revealed on May 13th: Ford's stock fell 12.5 cents yesterday, to $57.75, on the New York Stock Exchange.5

References:
1: http://www.nytimes.com/2001/10/11/business/dividend-at-ford-is-being-cut-inhalf.html?n=Top%2FReference%2FTimes%20Topics%2FSubjects%2FC%2FCorpor ations 2:http://query.nytimes.com/gst/fullpage.html?res=9A07E7D81E30F937A25754C0A9 609C8B63 3:http://query.nytimes.com/gst/fullpage.html?res=9A07E7D81E30F937A25754C0A9 609C8B63 4: http://www.usatoday.com/money/autos/2006-07-13-ford-usat_x.htm 5: http://www.nytimes.com/1994/05/13/business/company-news-ford-stockholdersclear-way-for-2-for-1-split.html