Subaru (FUJHY): High Dividend-Cut Risk Amid Production Halt and Strategic Shifts

Subaru Corporation (FUJHY) has long been a favorite among dividend-focused investors, offering a steady yield and a reputation for reliability. However, the automaker now faces a perfect storm of operational and strategic headwinds that could jeopardize its dividend sustainability. From a rumored production halt in the U.S. to a forced reevaluation of its global supply chain and electrification roadmap, Subaru's ability to maintain its dividend in the coming years is under significant pressure.

Tariffs and the Shadow of a Production Halt

In March 2025, U.S. President Donald Trump's executive order imposing a 25% tariff on imported automobiles and parts sent shockwaves through the automotive sector. While Subaru of America (SOA) denied halting production or sales, internal communications and dealer reports suggested a temporary pause in accepting new orders. Lisa Quan, VP of Vehicle Planning and Logistics at SOA, reportedly warned of “business uncertainties” and emphasized that prices for vehicles in the pipeline would remain unchanged until April 11, 2025. Though unverified, these claims underscored the company's vulnerability to sudden policy shifts.

The tariffs' financial impact is already visible. Subaru's fiscal year 2025 (FYE 2025) results showed a 13.4% drop in operating profit to ¥405.3 billion, with overseas sales declining 5.2% to 832,000 units. CEO Atsushi Osaki has estimated a potential $2.5 billion hit in FYE 2026 if the company fails to adapt. This has forced Subaru to pivot toward U.S. production, with plans to expand its Indiana plant to 500,000 units annually—a costly and time-intensive endeavor that diverts resources from R&D and shareholder returns.

Strategic Shifts and Electrification Uncertainty

Subaru's long-term vision includes a transition to battery-electric vehicles (BEVs), but the tariffs have complicated this path. The company is now considering mixed production models that include gasoline or hybrid vehicles at its Yajima plant in Japan, which is being retooled for EVs. This pivot reflects a pragmatic response to market uncertainty but risks diluting its commitment to electrification.

The Yajima plant's current production interruptions—due to retooling—have already dented sales expectations for FYE 2026. Meanwhile, Subaru's U.S. manufacturing capacity expansion comes with its own risks, including high upfront costs and the need to compete with domestic automakers already scaling EV production. These strategic recalibrations could strain cash flow, leaving fewer resources to fund dividends.

Dividend Sustainability: A Delicate Balancing Act

Despite a recent upward revision of its year-end dividend to ¥67 per share (a ¥19 increase), Subaru's dividend policy now faces existential questions. The company has committed to a total return ratio of 40% or higher, but its FYE 2025 results show a 12.2% decline in profit attributable to owners of the parent to ¥338.1 billion. With operating profit targets for FYE 2026 slashed to ¥100 billion—a 75% drop from FYE 2025—there is little room for error.

Subaru's dividend payout ratio, currently around 3.5% of equity, appears modest, but this metric masks the company's deteriorating profitability. If operating margins continue to contract due to tariffs, supply chain costs, and U.S. production investments, the dividend could become unsustainable. The company's refusal to provide a detailed FYE 2026 forecast further clouds the outlook, suggesting a lack of confidence in its ability to meet expectations.

Investment Implications and Risks

For income investors, Subaru's high dividend yield (currently ~4.2%) is tempting, but the risks are substantial. The automaker's reliance on a volatile U.S. market and its exposure to global trade policies make it a precarious bet. While the dividend increase for FYE 2025 offers short-term optimism, the company's financial trajectory—marked by declining profits and capital-intensive overhauls—raises red flags.

Investors should monitor two key metrics:
1. U.S. Production Costs and Tariff Adjustments: Any further hikes in tariffs or delays in Indiana plant expansion could accelerate margin compression.
2. Electrification Progress: Delays in BEV production or a pivot to hybrid models could signal a retreat from long-term growth goals, further pressuring profitability.

A dividend cut in FYE 2026 is not a foregone conclusion, but the risks are elevated. Given the uncertainty, investors might consider hedging their exposure by diversifying into automakers with more resilient supply chains or those less dependent on U.S. trade policy.

Conclusion

Subaru's dividend, once a cornerstone of its appeal to income investors, now hangs in the balance. While the company's recent shareholder return policy revision demonstrates a commitment to dividends, the operational and strategic challenges it faces—tariffs, production shifts, and electrification delays—could force a reassessment of priorities. For now, the yield remains attractive, but the path to sustainability is fraught with obstacles. Investors should proceed with caution and brace for potential volatility in both the stock price and dividend outlook.