Global Insight Perspective | |
Significance | The headwinds affecting Ford's North American restructuring programme have grown stronger since the beginning of this year, Chief Executive Officer Bill Ford said yesterday as he announced the company's decision to halve its third-quarter dividend, while beginning to offer generous powertrain warranties. |
Implications | Assuming that its fourth-quarter dividend will also be cut, Ford could save around US$185 million this year. While this cash will undoubtedly come in handy as Ford prepares to fund the higher warranty bill, it is a minor sum considering that the company's global automotive operations registered a US$184 million pre-tax loss in the first quarter of this year alone. |
Outlook | The generous warranty offer should definitely boost Ford's appeal in the showrooms, but it could also spark a new profit-eroding incentives battle in the cut-throat U.S. market if other manufacturers feel compelled to match the offer. Nevertheless, this is probably a risk worth taking for Ford as its new crossovers are rolled out onto the competitive marketplace. |
Ford Cuts Dividend, Extends Warranties
The headwinds affecting Ford's North American restructuring programme have grown stronger since the beginning of this year, Chief Executive Officer (CEO) Bill Ford said yesterday as he announced the company's decision to halve its third-quarter dividend, as part of a series of measures designed to give the “Way Forward” plan a boost.
Ford will halve its quarterly dividend to US$0.05 per share on its class-B and common stock. It is the first time in four years that the “Blue Oval” has cut the dividend, unchanged at US$0.10 per quarter since 2002. In addition, Ford announced that fees paid to board members will also be halved. According to Reuters, Ford's board members each received US$200,000 in fees last year.
Ford also announced that the standard powertrain warranty on all Ford and Mercury vehicles will be extended from three years, or 36,000 miles, to five years, or 60,000 miles, while Lincoln's four-year, or 50,000-mile, standard powertrain warranty is being extended to six years, or 70,000 miles. In addition, Detroit News has reported that Ford will offer free roadside assistance for the entire warranty period.
Outlook and Implications
Ford continues to face difficulties in its efforts to turn around its operations, slowed down by rising oil prices and shifting consumer tastes. "The headwinds we faced at the beginning of 2006 have only become stronger, as consistently higher gasoline [petrol] prices in the U.S. have caused consumer purchase preferences to shift away from SUVs and large trucks to smaller cars and crossover vehicles", Bill Ford said. Ford acknowledges that smaller cars and crossovers are the way forward, but the truth is that large trucks and SUVs remain the main driver of the company's revenues for the time being, resulting in the need to cut costs wherever possible.
However, the halving of the quarterly dividend will not provide significant relief. Ford paid US$738 million in dividends last year. Assuming that its fourth-quarter dividend will also be cut in half, Ford's full-year dividend outflow should decrease by around US$185 million. While the saved cash will undoubtedly come in handy, it represents a minor sum considering that Ford's global automotive operations registered a US$184 million pre-tax loss in the first quarter of this year alone, while its net loss totalled US$1.2 billion as a result of large restructuring charges. Looking ahead, Ford's finance department will have to prepare to fund another bill following the company's decision to extend warranties to 60 months.
On a positive note, the generous warranty offer leaves Ford’s rivals well behind and should thus definitely boost its appeal in the showrooms. On the other hand, however, it could spark a new profit-eroding incentives battle in the cut-throat U.S. market if other manufacturers feel forced to match the offer and make 60-month warranties the industry standard. Nevertheless, this is probably a risk worth taking for Ford, which needs to convince consumers that its new crossovers and smaller vehicles in general are appealing models as they are rolled out onto the competitive marketplace.