Magna International Inc.: Consider This Solid Dividend Stock on the Cheap
Not a Market Favorite, But Deserves Investor Attention
While there’s still plenty of uncertainty surrounding the world economy, stock market investors in the U.S. seem to be having a good time, at least in recent weeks. In fact, as of this writing, both the S&P 500 index and the Dow Jones Industrial Average are on track to deliver their best June performances in decades. (Source: “The Dow Is on Track to Post Its Best June Since 1938,” Fortune, June 24, 2019)
If you already own a portfolio of dividend stocks, rising stock prices are certainly good news. I mean, who wouldn’t want to see the value of their portfolio going up in a market rally?
If you are looking to build a dividend portfolio, on the other hand, you’ll be facing higher price tags on most tickers. Meanwhile, the inverse relationship between dividend yield and stock price also means as the market went up, dividend yields are now subdued.
And that’s why I believe it’s a good time to check out Magna International Inc. (NYSE:MGA).
For those not in the know, Magna is an automotive supplier headquartered in Aurora, Ontario, Canada. While the company is based north of the border, its stock is also listed on the New York Stock Exchange, so it’s very convenient for American investors to own MGA shares.
Also, while Magna is not as well known as the automakers that build cars under their own brand names, it is nonetheless a big player in the global automotive industry. To give you an idea, Magna’s parts can be found in cars built by Detroit’s “Big Three,” as well as in cars made by Tesla Inc (NASDAQ:TSLA), Toyota Motor Corp (NYSE:TM), and BMW AG (OTCMKTS:BMWYY, ETR:BMW), among others.
Today, Magna has 338 manufacturing operations and 89 product development, engineering, and sales centers located in 28 countries around the world. Other than supplying vehicle bodies, chassis, powertrains, and other systems, the company also has complete vehicle engineering and contract manufacturing expertise.
Not a Hot Stock at the Moment
As I mentioned earlier, the U.S. stock market has made some solid advancements recently. However, MGA stock seems to have been left behind. In just the last two months, shares of Magna International Inc. have tumbled more than 13%, and over the past year, the stock is down more than 20%.
Chart courtesy of StockCharts.com
Now, you might be wondering why I’m looking at this beaten-down stock. Well, the first reason is that, as MGA shares slipped, the company’s value started to appear.
You see, as the U.S. stock market rallied, many companies are now trading at bloated valuations. The current S&P 500 price-to-earnings (P/E) ratio is 21.8 times, substantially higher than its historical average of 15.75 times. (Source: “S&P 500 PE Ratio,” Multpl.com, last accessed June 25, 2019.)
Magna International Inc., on the other hand, has a P/E ratio of just 5.99 times, which is not only substantially lower than the P/E of the benchmark index, but also lower than the Auto, Truck, & Motorcycle Parts industry’s average P/E of 14.37 times. (Source: “Magna International Inc (MGA),” Reuters, last accessed June 25, 2019.)
Meanwhile, Magna’s price-to-sales ratio (0.39 times) and price-to-cash-flow ratio (3.88 times) are also much lower than its industry’s averages (1.78 and 8.43 times, respectively).
The second reason why I’m checking out this auto parts supplier is its dividends. As Magna stock tumbled, its yield has gone up. With a quarterly dividend rate of $0.365 per share, this stock offers an annual yield of three percent at the current price.
To put this in perspective, the average dividend yield of all S&P 500 companies is 1.9% at the moment. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed June 25, 2019.)
A Top Pick for Dividend Investors?
The best part is, unlike many beaten-down dividend stocks, Magna International still offers top-notch dividend safety.
In 2018, the company generated adjusted diluted earnings of $6.71 per share while paying four quarterly dividends totaling $1.32 per share. In other words, Magna was paying out just 19.7% of its profits last year. (Source: “Press Release – Magna Announces Fourth Quarter and 2018 Results and Raises Quarterly Cash Dividend by 11%,” Magna International Inc., February 22, 2019.)
Fast-forward to this year and things look just as solid. In the first quarter of 2019, the company’s adjusted diluted earnings came in at $1.63 per share. Given MGA stock’s cash dividend of $0.365 per share declared and paid during the quarter, it achieved a payout ratio of 22.4%, not a high number by any means. (Source: “Press Release – Magna Announces First Quarter Results,” Magna International Inc., May 9, 2019.)
What’s even more impressive is that the company managed to increase its dividends consistently, despite maintaining a very conservative payout ratio. Five years ago, Magna stock had a quarterly dividend rate of $0.19 per share (split adjusted). Today, the amount stands at $0.365 per share. That’s an increase of 92.1%. (Source: “Dividends,” Magna International Inc., last accessed June 25, 2019.)
The Bottom Line on Magna International Inc.
At the end of the day, Magna International is not perfect. The automotive industry is known for being cyclical, and there have been signs that business could be slowing down at this Canadian automotive parts supplier.
But because Magna’s payout ratio is so low, the company should have no problem maintaining that payout, even if the automotive industry enters a downturn. And if things weren’t as bad as the MGA stock bears think, the company will likely keep raising its dividend at a decent pace.
Combined with its inexpensive valuation and generous yield, I’d say Magna International Inc. remains a top pick for income investors to consider.