Ford Motor Co said it is paying $3.8 billion in cash to settle a debt to a health care trust in a signal of its confidence that it remains on track to deliver solid profits this year.

In addition, Ford said on Wednesday it is making a $255 million payment on preferred stock dividends that had been deferred when the automaker was trying to conserve cash.

The moves sent Ford shares up 5 percent and removed more than $4 billion in debt from its balance sheet, addressing one of the major remaining investor concerns about the automaker's turnaround plan.

This sends a strong signal around management's positive view on cash generation at Ford Motor, credit quality at Ford Motor Credit and their likely view that the stock is undervalued, said Barclays analyst Brian Johnson.

Ford said it opted not to use stock to pay $610 million to a health-care trust aligned with the United Auto Workers union. Analysts had said the prospect of a stock payment to the UAW had weighed on Ford shares in recent weeks.

Paying the UAW-aligned trust fund in Ford shares would have diluted equity for investors and could have been read as a sign that management viewed the stock as near a peak.

Ford stock dipped below $10 on Tuesday for the first in five months, partly on speculation that the company would meet debt payments by issuing more stock.

Our 'One Ford' plan to profitably grow our business is working, and we are increasingly confident about the future, Ford Chief Executive Alan Mulally said in a statement.

Ford said it intends to resume making quarterly dividend payments on preferred stock starting on July 15.

The biggest chunk of three separate payments announced on Wednesday was $2.9 billion to pay off a note owed to the UAW-aligned retiree medical benefits trust at 98 cents on the dollar.

The UAW agreed to that discount in exchange for the early payment, Ford said.

Ford also made scheduled payments of $860 million on notes owed to the UAW fund, established under a 2007 contract with the union.

'A BOLD MOVE'

Barclays' Johnson called the prepayment of debt a bold move that came as a surprise given recent market speculation that the automaker would make part of its payment to the health-care fund in stock.

Moody's Investors Service kept its credit rating unchanged on Ford, saying that the debt repayment would accelerate the improvement in Ford's credit quality that it had anticipated when it upgraded the automaker in May.

In afternoon trading, Ford shares were up 5 percent at $10.40 on the New York Stock Exchange.

The stock price gain corresponded with a surge in demand for call options on Ford shares, a bet that the rally that began on Wednesday could continue in coming weeks.

Ford's overall option volume was 2.2 times greater than average daily turnover, with about 131,000 calls and 52,000 puts traded by late afternoon, according to option analytics firm Trade Alert.

Ford ended the first quarter with automotive debt of $34.3 billion, but paid down $3 billion of debt in April that will be reflected in second-quarter results.

The April payment and the debt cut announced today, which together total $7 billion, leave $27 billion of debt remaining, Ford said. The $7 billion debt reduction will save more than $470 million in annual interest payments, it said.

Ford was the only U.S. automaker to avoid bankruptcy last year. It borrowed more than $23 billion in late 2006, putting up nearly all of its remaining assets, including the familiar blue oval logo, to maintain a cash cushion for its turnaround.

By contrast, Ford's larger rival, General Motors Co GM.UL, ended the first quarter with about $14 billion in debt.

The question of how quickly Ford can pay down its debt has been widely seen as one of the remaining risks for the second-largest U.S. automaker, despite strong gains in quality and sales in recent months.

We expect to continue to improve our balance sheet as we deliver on our plan, Mulally said. Importantly, our business results make it possible to take these actions while still accelerating the investments we are making in our business to serve our customers with the very best cars and trucks.

Ford, which surprised Wall Street with its first annual profit in four years in 2009, despite a severe downturn, has forecast a solid profit for 2010.

(Additional reporting by Doris Frankel in Chicago; editing by Gerald E. McCormick and Maureen Bavdek)

Ford Motor Company