An auto dividend
Ford Motor Company (NYSE:F) has the distinction of being the only major U.S. auto manufacturer to refuse government bailout funds during the financial crisis and the first to resume paying a dividend. Ford Motor Company (NYSE:F) began paying a dividend back in 1956, and up until 2006 quarterly payments occurred uninterrupted. But big losses in 2006 caused first a cut and then a suspension of the dividend altogether, and the financial crisis that soon followed forced Ford into survival mode.
But auto sales have recovered, with J.D. Power & Associates forecasting that 16 million vehicles will be produced in 2013, a number not reached since 2002. In 2012 Ford began paying a dividend once again, and after four quarterly payments of $0.05 per share, the dividend was doubled in January of this year. The stock now yields about 2.7%.
There are a few problems with Ford Motor Company (NYSE:F), though. From 2002 through 2006 the dividend wasn’t increased at all, and the current dividend is now at that same level after the increase earlier this year. Those expecting serious dividend growth may need to temper their expectations. In addition, Ford’s balance sheet isn’t the cleanest. Although the company has $51 billion in cash and short-term investments the company’s debt total’s $107 billion. Most of this debt is attributed to Ford’s Financial Services arm, with only about $14 billion in automotive debt.
Because of this debt the company pays quite a bit of interest, a total of about $3.8 billion in 2012, with $713 million of this attributed to the automotive debt. Ford also has sizable pension obligations, further muddling the balance sheet. Along with these big interest payments are big capital expenditures. In 2012 capex totaled $5.5 billion. Interest and capex eat up an awful lot of the company’s cash flow.
I expect that the company will be a bit more cautious this time around in an effort to avoid a dividend cut like we saw in 2006. I don’t think Ford will be the kind of company that meaningfully raises its dividend every year. As a dividend growth stock, Ford just doesn’t fit the bill.
A low-yielding bank
Goldman Sachs Group, Inc. (NYSE:GS) likes U.S. Bancorp (NYSE:USB) as a dividend stock, but I think there are better banks out there. In fact, my Ultimate Dividend Growth Portfolio, which you can track here, contains three other banks – Wells Fargo & Co (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM), and BB&T.
U.S. Bancorp (NYSE:USB) has one the highest returns on assets of any bank, but its dividend yield is low at just 2.2%. This compares to Wells Fargo’s 2.98% yield, JPMorgan Chase & Co. (NYSE:JPM)’s 2.83%, and BB&T’s 2.80%.
There is room for dividend growth, though. U.S. Bancorp (NYSE:USB)’s payout ratio based on 2012 EPS is just 27%, and from 2003 to 2007 the dividend grew at an annualized rate of 17%. Like most banks the dividend was slashed during the financial crisis, and the current dividend is still nowhere near the peak levels.
Wells Fargo & Co (NYSE:WFC), for example, has a payout ratio of just 36% and a much higher yield. With the dividend growth prospects similar, the higher yield makes Wells Fargo & Co (NYSE:WFC) a superior dividend growth stock. JPMorgan Chase & Co. (NYSE:JPM) has a payout ratio of 29%, and BB&T 34%. The dividend growth prospects for U.S. Bancorp are just not good enough to justify the low yield.
There’s a balance between yield and growth, and U.S. Bancorp doesn’t have it.
The best big oil dividend
I agree with Goldman Sachs Group, Inc. (NYSE:GS) on its pick of Chevron Corporation (NYSE:CVX), which has a place in The Ultimate Dividend Growth Portfolio. Chevron Corporation (NYSE:CVX) has been a consistent dividend growth stock for a long time, increasing its dividend at an annualized rate of 10.5% over the past decade. Combined with a yield of 3.19% this makes Chevron the best big oil stock out there.
Exxon Mobil Corporation (NYSE:XOM) has grown its dividend at a slightly lower rate over the past decade, 9.3% compared to Chevron’s 10.5%, but its lower yield is what puts Chevron on top. And Chevron Corporation (NYSE:CVX)’s dividend growth doesn’t seem to be slowing. The dividend payment which went ex-div on May 15 was 11% higher than the previous payment, a faster increase than the historical 10-year rate.
Demand for oil will keep rising, and although it’s becoming more difficult to locate new reserves around the world, this demand should drive Chevron’s dividend growth for years to come.
I also have BP plc (ADR) (NYSE:BP) in The Ultimate Dividend Growth Portfolio due to its almost 5% yield. BP plc (ADR) (NYSE:BP) cut its dividend in the wake of the Deepwater Horizon oil spill in 2010, and the company still faces a myriad of lawsuits and possible fines associated with that disaster. BP plc (ADR) (NYSE:BP) is certainly riskier than Chevron for that reason, as a huge fine could put a halt to the dividend growth. But the last increase in 2012 was a solid 12.5%, and with a 5% yield BP seems like it’s worth the risk.
The bottom line
I think that Ford’s dividend growth will be lackluster due to its large debt obligations, and that U.S. Bancorp is not the most attractive bank in terms of the dividend. Chevron, however, is a gem of a dividend stock and should be part of every dividend investor’s portfolio.
The article Goldman’s Dividend Picks: Cars, Banks, and Oil originally appeared on Fool.com and is written by Timothy Green.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Chevron and Ford. The Motley Fool owns shares of Ford. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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