By Al Root

President Donald Trump threw auto makers a lifeline this past week, but tariffs still threaten billions in operating profits and cash flow, forcing investors to ask uncomfortable questions like this one: Is Ford Motor's dividend safe?

That might not seem like too big a worry after Trump tried to offer some clarity on Tuesday by updating his tariff policies for the auto industry. Auto levies, for instance, won't stack on top of other "reciprocal" penalties or those on steel and aluminum. What's more, there are offsets to tariffs on imported car parts that could save domestic auto makers roughly $2,000 per vehicle.

Before Trump announced those changes, the cost to assemble a car could have risen as much as $5,000 to $10,000, but now it should be half that. What's more, Ford, which has a 6.1% dividend yield, declared its regular 15-cent dividend for the second quarter this past week, and it has less exposure to tariffs than its North American peers, save Tesla. Even the market doesn't appear all that worried about Ford -- its stock is roughly unchanged in 2025, outperforming General Motors and Chrysler parent Stellantis, which have both suffered double-digit losses.

But a reduction in tariffs isn't the same as eliminating them, and substantial cost increases remain a reality. Even after the president's action, BNP Paribas Exane analyst James Picariello estimated the impact on Ford's operating profit to be a hit of $2.7 billion in 2025, $2.3 billion in 2026, and $2 billion in 2027. That's significant. The auto maker is expected to generate an average annual free cash flow of about $3.2 billion over those years. Ford will work to mitigate tariff-related cost increases, but the raw math suggests more than half of that cash flow is at risk.

The hit to cash flow could put pressure on Ford's dividend, according to Bernstein analyst Daniel Roeska and Deutsche Bank analyst Edison Yu. Why should we listen to them? Both predicted that GM would have to halt buybacks for a period because of tariffs, and that's exactly what GM did this past Tuesday, when it told investors its financial guidance could no longer be relied upon.

Ford is less vulnerable to tariffs than GM, Roeska says, but it's starting from a relatively weaker point. GM imports roughly 45% of the cars it sells domestically, according to Bloomberg, while Ford imports only about 20%. Ford, however, was expecting a 2025 operating profit of only $7.8 billion at the midpoint of guidance, compared with GM's $14.7 billion.

GM also prefers buybacks to dividends. Shares yield about 1%, and annual dividend payments consume about $500 million. Ford does the opposite. Given its 6.1% yield, its annual dividend payments amount to $2.4 billion.

That amounts to roughly 75% of Ford's projected annual free cash flow for the coming three years. That's a relatively high ratio, even without tariff impacts. Dividend payers in the S&P 500 are expected to pay an average of about 35% of expected 2025 free cash flow to shareholders, and those stocks yield an average of 2.3%.

Alarm bells sound when payoff ratios reach 80%, according to Wolfe Research Chief Investment Strategist Chris Senyek. Ford isn't paying out 80%-plus of forecasted free cash flows yet, but those forecasts, for the most part, don't include tariff impacts, which, optimistically, could reduce it by $1 billion to $2 billion.

To be sure, tariff policies will continue to evolve. Picariello believes car companies will continue to lobby for lower tariffs on imported parts. Still, things look tenuous. Ford reports first-quarter earnings on May 5. Investors will be looking for details about how tariffs will impact results.

They should look for comments about the dividend, too.

Write to Al Root at allen.root@dowjones.com

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May 01, 2025 02:00 ET (06:00 GMT)

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