Ford May Signal Weakness Funding Retiree Health Care With Stock
Ford Motor Co. may make part of its required $859 million payment to a union health-care fund this week in stock, a sign of potential weakness in the shares as the U.S. auto sales recovery stalls, analysts said.
Ford must pay the United Auto Workers Retiree Medical Benefits Trust by June 30 to fund benefits for former hourly workers. Ford has the option to pay as much as $610 million in stock under an agreement reached with the union last year, and the second-largest U.S. automaker may choose shares in order to conserve cash, said Brian Johnson, a Barclays Capital analyst.
If Ford issues stock to pay the fund, investors may see it as a sign the company considers its shares overvalued in a sales environment that the head of its Americas unit described as “flat-lined.”
“Investors look at this as an indication of whether management sees their stock as cheap or expensive,” said Chicago-based Johnson, who has a neutral rating on Ford common shares. “If it’s cheap, they use cash. If it’s expensive, they’ll use stock.”
John Stoll, a Ford spokesman, declined to comment on how the automaker will pay the trust.
“We’ll meet our obligation,” Stoll said in an interview. “We’re not in a position to talk about an amount or how exactly we’ll pay for it.”
Ford used cash for its first payment of $610 million in December and pre-paid an additional $500 million with its shares in the midst of a fourfold annual gain. The company said at the time that it paid in cash because the stock’s volume-weighted average share price in the period before the payment, which determines the price of the stock it issues to the trust, was $9.13, less than the $10 the stock closed at on Dec. 31.
The stock closed June 25 at $10.75, a 6.2 percent discount to the average of about $11.46 in the previous 30 trading days. The company has 3.34 billion shares outstanding.
The shares fell 32 cents, or 3 percent, to $10.43 at 4:15 p.m. in composite trading on the New York Stock Exchange.
“I see this going equity because of the 30-day share price and the number of new shares would only represent 1.5 percent of total shares in circulation,” said Kristin Dziczek, director of the labor and industry group at the Center for Automotive Research in Ann Arbor, Michigan. “That’s not a whole lot of dilution.”
Ford should pay in cash as it did last time, said Bernie McGinn, president of McGinn Investment Management, which owns 320,000 Ford shares.
“They didn’t want to pay in stock last time because of the potential for the stock to rise, and that story hasn’t changed,” said McGinn, whose company is based in Alexandria, Virginia. “The people at Ford should be feeling pretty confident now.”
Goldman Sachs Group Inc. last week forecast “sluggish” auto sales, saying buyers are hesitant to borrow in an economy with high unemployment.
U.S. auto sales have “flat-lined,” showing no improvement since the third quarter of last year, said Mark Fields, Ford’s president of the Americas. The annualized light vehicle sales rate of 11.2 million through May is at the low end of Ford’s forecast for the year.
“The consumer is feeling a bit better, but not enough to go out and go back to the old ways of spending,” Fields said on June 23. “It gives us pause because of the tight labor market and the overall situation in the credit markets.”
Paying in stock means Ford could deploy the cash it saves to reduce its debt and improve its balance sheet, Barclays’s Johnson said. The shares are more likely to gain if Ford pays in cash because investors won’t face any dilution in their holdings, he said.
After Ford paid cash on Dec. 31, the shares rose 45 percent to peak at $14.46 on April 26. They have since fallen 28 percent. Ford is up 4.3 percent this year.
Ford has $22.3 billion in automotive gross cash after paying $3 billion on its revolving credit line in April, Fields said. Ford also has $31.3 billion in automotive debt, higher than rivals such as General Motors Co., the largest U.S. automaker, he said.
Ford borrowed $23 billion in late 2006, giving it a cash cushion that helped it withstand losses and avoid the bankruptcies that befell its U.S. rivals last year. The company was able to develop new models as the U.S. auto market fell to its lowest level in 27 years in 2009. Ford has said the debt load now puts it at a disadvantage against GM and Chrysler, which had their obligations cut in bankruptcy.
“Clearly, we have more debt than our competitors,” Fields said last week at the Deutsche Bank 2010 Industrials Conference. “Improving our balance sheet is a very key priority, and I want to assure you we have a plan to do that.”
The UAW, GM, Ford and the predecessor of Chrysler Group LLC agreed in 2007 to create retiree health-care trusts to remove those liabilities from their labor costs. Prior to the payments Ford has made, the company owed $13.2 billion to the union-run health-care trust, also known as a Voluntary Employee Beneficiary Association, or VEBA. Ford has annual payments scheduled through June 2022, according to company filings.
Ford’s U.S. sales have risen 30 percent this year, almost twice as much the overall gain in industry sales. Chief Executive Officer Alan Mulally expanded the namesake brand and improved quality, helping the company earn $2.7 billion last year after three years of losses. Mulally has said the automaker will be “solidly profitable” this year.