On May 12, 2005, Bill Ford, Jr. informed shareholders that he will accept no cash compensation until Ford Motor Company’s automotive business is profitable on a sustainable basis. At first blush, this appears to be a noble gesture and certainly is wise from a public-relations standpoint. After all, Bill Ford has taken great pride in transforming Ford Motor Company into a good "corporate citizen" especially on environmental issues — which, of course, is pure bunk. With Standard & Poor’s recently downgrading Ford Motor Company’s credit rating to "junk", it is appropriate for Bill Ford to play the part of the "good" corporate executive and do his part to help preserve Ford Motor Company’s precious cash reserves — while also linking compensation to corporate performance. Ultimately, an excellent way to measure Bill Ford’s character will be directly linked to whether or not he has the courage to cut Ford Motor Company’s annual dividend from 40-cents per share to zero. I have no doubt that Ford Motor’s creditors are watching this closely.
One of the largest bankruptcies, in U.S. history, pertained to the June 2001 Chapter 11 filing by Reliance Group Holdings (NYSE symbol REL). The crown jewel of Reliance Group was Reliance Insurance Company — which had been in business since 1817. Saul Steinberg was the man at the helm of the Reliance empire (which was a publicly held company that was controlled by the Steinberg family). He was the corporate raider that "greenmailed" The Walt Disney Co. and received a $60 million premium — for his Disney shares — in order for him to simply walk away. Saul Steinberg had an extravagant lifestyle which was funded by his lavish salary and Reliance Group’s annual dividend of 32-cents per share. In the end, it was clear that Mr. Steinberg was an incompetent manager who had no business running a major insurer such as Reliance Insurance Company.
While he was driving this company into the ground, Reliance paid its 32-cent dividend virtually until the bitter end. Even as Reliance was bleeding red ink, the pockets of the Steinberg family members were being lined with cash dividends from this dying company. In total, Saul Steinberg himself received over $100 million in cash dividends related to his 31% ownership stake in Reliance Group Holdings. To recklessly pay such dividends exposed Saul Steinberg’s unseemly selfishness and total disregard for creditors and policyholders. Mr. Steinberg’s actions revealed a complete lack of moral fiber.
In 2004, Ford Motor Company paid out $733 million in shareholder dividends. One must wonder how wise it was to pay out such a large sum of cash considering Ford Motor Company’s fragile financial condition. The following points illuminate several disturbing financial weaknesses as of fiscal year-end December 31, 2004:
- On an "as-given" basis, Ford Motor’s automotive operations had a deficit working capital position of $10.3 billion.
- Ford had 35 cents of cash and marketable securities for every dollar of current liabilities.
- Ford’s total liabilities amounted to a staggering $175.8 billion.
- With a tangible equity position of about $8.8 billion, Ford Motor Company’s total liabilities to equity ratio stood at 20 to 1 — keep in mind that 3 to 1 is considered risky.
Perhaps there is a little bit of Saul Steinberg in Bill Ford. To be sure, foregoing one’s own salary makes for good press coverage. However, keep in mind that Bill Ford, Jr. owns 8,687,315 shares of Ford Motor Company’s common and Class B stock. With Ford Motor paying a 40-cent-per-share dividend (on both common and Class B stock), Bill Ford’s annual dividend income amounts to nearly $3.5 million. Hence, Mr. Ford certainly is not hurting for cash. Moreover, just like Reliance, Ford Motor Company is a family controlled company — such control emanates from the special voting rights of the Class B stock. With 71 million shares of Class B stock outstanding, the Ford family received $28.4 million in dividend income (in 2004) related to the Class B stock alone. Once again, in light of Ford Motor’s terrible financial condition, paying such dividends is irresponsible and reckless — apparently, Bill Ford (like Saul Steinberg) saw no ethical issues in enriching the family while the company hurtled toward "junk" status.
Bond holders, other creditors, and pensioners should take note of this. Members of the Ford family are lining their pockets while the company is facing stiff competition from Japanese automakers and while sales of its top-selling pickups and SUVs are withering in the face of high gasoline prices. There comes a point in time where Ford’s management must show the intestinal fortitude necessary to make tough decisions such as suspending the dividend in order to preserve $733 million in cash annually. If Bill Ford’s character is anything like his managerial competence, then I foresee Ford Motor Company paying a dividend right up to the day it declares Chapter 11 bankruptcy. So to answer the question posed in the title: yes, Bill Ford will pull a "Saul Steinberg" and enrich the family, at the expense of creditors and pensioners, as the company slides into oblivion — thereby providing some financial cushion, for the family, as the stock heads to $0.
Eric Englund [send him mail], who has an MBA from Boise State University, lives in the state of Oregon. He is the publisher of The Hyperinflation Survival Guide by Dr. Gerald Swanson. You are invited to visit his website.