Ford and GM differ on dividend policies. Here is why and what it means.

Ford Motor

and

General Motors

are in the same business and are headquartered in the same state. But they could not be more different when it comes to their dividend policies.

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(ticker: F) restored its dividend last fall after it suspended it more than two years ago, when the pandemic first broke out, convinced that it could return funds to shareholders and make the necessary investments in its future, in particular electric vehicles or electric vehicles.

However, General Motors (GM), which suspended its dividend in the second quarter of 2020 due to the pandemic, shows no signs of restoring it. No company has bought many shares.

David Whiston, a stock analyst at Morningstar, says he believes both companies have the funds to spend on developing electric vehicles and pursuing other development projects – and paying dividends or buying shares. “But they just differ in how they return cash to shareholders,” he says.

Divergent dividend and repurchase policies of carmakers, therefore, offer an interesting case study of how mature companies in emerging industries approach return on equity.

For many years,

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and GM were considered as traditional circular dividend-paying shares. In 2019, Ford and GM paid about $ 2.4 billion in dividends.

Tesla

(TSLA), of course, spends a lot on EVs, but does not pay a dividend.

The cost of developing these new technologies is enormous. For example, in a teleconference in March, Ford CEO James Farley said the company planned to invest $ 5 billion “in electric cars this year alone.” And by 2026, he added, “we will have invested more than $ 50 billion in EVs and the development of new technologies.”

For older automakers, says Adam Jonas, head of global automotive and mobility research at Morgan Stanley, “it’s hard to be a cashback story because then it ‘s like saying, anything new, to limit our core business and have extra cash to return to shareholders. ‘ ”

Consider how GM CEO Mary Barra approached the issue during the company’s first-quarter earnings call in February, when she told analysts that the automaker was not going to reinstate the dividend at the time.

“Our clear priority is to accelerate our EV project and drive growth, and we want to maintain maximum investment flexibility as opportunities arise on our growth platforms,” ​​he said.

Barra prefaced these remarks by saying that “we will look at all opportunities for the return of excess capital to shareholders.” But it was not a firm commitment to the dividend, especially a regular one, as the company turns its attention to the next generation of cars, including autonomous driving vehicles. The company’s cruise division is developing this technology.

General Motors declined to comment on its dividend policy, citing Barra’s comments in February.

Sarat Sethi, chief executive of GMLA-owned investment consulting firm DCLA, says the automotive dividend policy gives it “more flexibility and does not depend on capital markets for capital – or less dependents”.

At the same time, he adds, “they mean to investors and their competitors that they are committed to the development of the company and feel that the opportunities are greater in reinvestment than in a dividend.”

Whiston says he does not expect to see General Motors return its dividend at this time “at least in normal form”, referring to a quarterly disbursement. He believes that a more realistic possibility is for the company to pay a special dividend on a case-by-case basis.

Ford, meanwhile, announced in October that it would return its quarterly dividend to 10 cents a share, down from 15 cents a share it paid before the pandemic. Chief Financial Officer John Lawler said at the time that the company had the financial means to fund its development initiatives and that it had no capital restrictions.

“We are confident that we can finance them and focus on the overall returns of the shareholders — not just the revaluation of the shares but also the dividend,” Lawler said.

The company could not be reached for comment.

An important element in different policies: There is a structural difference between the shareholding structure of Ford and General Motors. The Ford family owns a small stake in the company, but these shares represent 40% of the voting power in a dual-share structure.

“I think the Ford family wants to get paid,” Morningstar’s Whiston said in a statement. “I do not blame them. I would also like a dividend if I were a member of the Ford family. “But for this reason, you are not going to see the dividend go away like that of GM.”

In a statement earlier this year on the annual meeting and the power of attorney statement, Ford noted that “this [dual-class] The structure also ensures that the Company has a stable and loyal investor base throughout the financial recession and crises “.

General Motors, on the other hand, does not have a family that owns a significant stake in the company.

Jonas agrees that the Ford family’s share is an important element in the company’s dividend history. The resumption of Ford’s dividend last fall, he says, was a good example of a company that signaled its confidence in the business prospects in the market.

“It was a signal they wanted to send. “They obviously felt they were able to send it,” Jonas said, adding that it made the stock eligible for share dividends again.

The market liked what they heard and the stock rallied after the announcement of the dividend. However, it has fallen amid widespread market disaster in recent months, having returned around minus 41% this year as of June 14th. The stock recently had a return of 3.3%.

Shares of General Motors also suffered a big hit, falling about 43% during this period. And the stock has no return to reduce the market hit.

Write to Lawrence C. Strauss at lawrence.strauss@barrons.com

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