Ford Motor (F) is an iconic American company, having been in business since 1903. The Ford’s produced Model T was one of the most popular early cars. The vehicle was designed to withstand the rugged early roads across the U.S. The car was also very affordable allowing regular people access to motorized transportation.

Fast forward to today, Ford is the second largest car and truck manufacturer in the U.S. The company controlled more than 14% of market share in the U.S. last year. Ford trades with a market capitalization of $37 billion, generated $145 billion in sales last year and offers a dividend yield of 6.5%.

Still, investors buying Ford today need to understand that the company is far from a defensive name in times of a recession. Based on the company’s performance during the last recession, we believe it is possible that Ford’s dividend could be at risk in the next recession.

Last Recession Performance

Automotive sales are highly correlated to the health of the economy. In times of growth, consumers have more capital to spend and the confidence to make a new car purchase. When the economy is trending down, consumers tend to hold off on making new, large purchases. In a recession, consumers find alternative ways to acquire transportation or spend to keep their old cars running longer.

While each time is different, let’s examine how Ford performed during the last recession in order to gain an understanding of how the company will hold up in the next one.

This played out heading into the last recession. Below are Ford’s adjusted earnings-per-share totals before, during and after the last recession.

• 2004 adjusted earnings-per-share: $2.13
• 2005 adjusted earnings-per-share: $1.25
• 2006 adjusted earnings-per-share: $1.50
• 2007 adjusted earnings-per-share: $0.19
• 2008 adjusted earnings-per-share: $3.13
• 2009 adjusted earnings-per-share: $0.00
• 2010 adjusted earnings-per-share: $1.91
• 2011 adjusted earnings-per-share: $1.95
• 2018 adjusted earnings-per-share: $1.30

From the information above, we can see that Ford’s business was already performing rather poorly heading into the last recession. The company’s adjusted earnings-per-share traded off years of declines and growth before hitting $0.00 in 2009.

While the car maker eventually regained profitability, Ford still hasn’t taken out its pre-recession high of $2.13 of adjusted earnings-per-share. Helping to illustrate this fact is that the company earned $1.30 in 2018, well below its 2004 total.

Dividend Analysis

Looking at Ford’s performance leading up to and during the last recession shows a company struggling to maintain profitability. This eventually led to a dividend cut. The company cut its dividend almost 40% in 2006 and eliminated its dividend altogether in 2007.

The dividend wasn’t reinstated until 2012, but Ford hasn’t increased its quarterly payment since the 2/1/2016 payment. With a 6.5% yield, which is more than triple the average yield of the S&P 500, investors may not require that a company offer much in the way of dividend growth. That yield is only attractive, however, if the dividend is secure.

The company pays an annualized dividend of $0.60 and expects to earn $1.30 per share in 2019. This gives the company a forward payout ratio of 46%. This is above the five-year average payout ratio of 40%.

The payout ratio in itself isn’t an issue. What is an issue is Ford’s ability to remain profitable during a recession and as we saw in the section above, the company struggles to do just this.

Therefore, even with a very reasonable payout ratio today, we feel that Ford’s dividend could be in danger of being cut in the next recession.

Final Thoughts

Ford’s dividend yield is very attractive, especially compared to the market average, but the company has shown difficulty in maintaining its dividend during economic hardship. It is likely that auto sales will struggle during the next recession as consumer put off making large purchases. This makes it pretty clear that Ford is not a recession proof company. And due to Ford’s past history of cutting its dividend under economic duress, we encourage investors to look elsewhere for income from recession proof companies.