Will Ford restore dividend payments?

DETROIT — With a key debt rating agency giving it the thumbs-up – and further hikes anticipated – Ford Motor Co. is signaling it may soon restore its dividend, a move that could, in turn, help revive the maker’s flagging stock price.

With Ford now indicating its new contract with the United Auto Workers Union will actually lower its labor costs, Fitch Ratings bumped the carmaker’s credit rating up a notch to “BB+” on Thursday, S&P taking the same step on Friday while also removing Ford from its CreditWatch. Those upgrades fall just one step short of reaching the investment grade targeted by Ford CEO Alan Mulally.

In the past, it had been expected that Ford would wait until getting that investment grade status before restoring the dividend but, during a meeting with investors, Chief Financial Officer Lewis Booth indicated the additional upgrade, “is not an absolute necessity to pay dividends.”

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If anything, analysts say such a move would pay big dividends for Ford. The quarterly payout is a requirement in some investment communities, such as insurance companies and government pension plans, according to Joe Phillippi, chief analyst with AutoTrends Consulting.

“Many can’t own stocks that don’t pay at least some returns,” he noted, adding that, “This would open up a whole new class of investors…and that could drive up the stock price.”

On mid Friday morning, Ford was trading at just over $12 a share, its price up by more than a half dollar since the news of the Fitch upgrade was announced. But while it has bounced back from its 52-week low of just $9.32 a share, Ford is still trading well below the $18.97 peak it hit over the last year.

Whether it can maintain its current momentum remains to be seen. The maker is expected to deliver a slight year-over-year decline in third-quarter revenues, though perhaps not as serious as originally anticipated, with Itay Michaeli, of Citi Investment Research, this week upping his estimate of Ford’s third-quarter earnings from 44 cents to 46 cents a share, reaffirming his “Buy” recommendation.

A consensus of analysts gathered by DailyFinance.com, meanwhile, projects a solid turn upwards during the fourth quarter.

Holding down labor costs clearly will help going forward. Earlier this week, the United Auto Workers Union announced its members had ratified the new 4-year settlement with Ford. The contract contains a few costly provisions, including a $6,000 signing bonus and annual payouts to offset inflation. Those will add up to about $360 million in new costs, according to Mark Fields, Ford’s President of the Americas.

But there were concessions, as well, the union curbing its legal assistance program and agreeing to various steps meant to enhance productivity. And while second-tier workers will wind up making another $3 an hour by the end of the contract the UAW dropped demands to combine all workers in a single, higher tier. Most newly hired hourly workers will now make the lower wages.

“The work practice changes and increased uses of entry-level employees provide the opportunity for substantial cost savings and profit improvement as demand increases,” Fields said during the meeting with investors, the company predicting that an initial 1% hike in labor costs will actually turn into a reduction in costs by the end of the agreement.

That was enough to convince the maker to expand its production in the U.S. after years of transferring operations abroad or shifting to lower-cost U.S. suppliers. In all, Ford committed to an additional $6.4 billion in new investments under the contract, while adding 5,750 UAW jobs. Combined with prior promises, Ford now intends to boost U.S. employment by 12,000.

Fields today will be announcing a $1 billion investment – part of the new contract equation — at a Ford plant in Kansas City. It has been chosen to build the Transit van currently produced in Europe. The move will include the addition of a new stamping plant.

With the maker’s sales outpacing the overall rebound in the U.S. new vehicle market, and earnings expected to keep pace, most observers anticipate further credit rating upgrades by not only Fitch but S&P and Moody’s, the two giants in the field.

Whether Ford will wait or the agencies will act first, “I anticipate the dividend will be restored within the next quarter,” predicted analyst Phillippi.

Copyright 2011 The Detroit Bureau. All rights reserved.