This Dividend Growth Stock Just Gave Investors a 10.6% Raise
MGA Stock Deserves Income Investors’ Attention
In a surging stock market, dividend announcements often get ignored.
I mean, with the S&P 500 Index climbing more than 10% in the first two months of 2019, who cares about those dividends that amount to just a few percent annually?
The thing is, though, while I like capital gains as much as the next investor, I need to point out that just a few months ago, things were quite different. In December 2018, the S&P 500 Index tumbled 9.2%, marking the benchmark’s worst December performance since 1931 and its biggest monthly loss since February 2009.
It’s in volatility like this that the value of dividends truly shines through. The market could be having a massive sell-off, but when a company decides to pay a dividend, shareholders get a cash payout no matter how bad the tumble is in the company’s stock price.
What could be even better for shareholders is a dividend increase. In an era filled with uncertainty—interest rates, trade wars, geopolitical tensions—few things cheer up investors more than getting a pay raise from their passive income portfolio.
That’s why today, I want to talk to you about one of my favorite dividend stocks that just raised its payout again, Magna International Inc. (NYSE:MGA).
Magna International Inc.
For those not in the know, Magna International Inc. is one of the biggest automotive suppliers in the world. The company’s specialties include body exteriors and structures, power and vision technologies, seating systems, and even complete vehicle solutions.
To give you some perspective, Magna’s parts are used in vehicles made by General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F), Fiat Chrysler Automobiles NV (NYSE:FCAU), Tesla Inc (NASDAQ:TSLA), and BMW AG, just to name a few.
Magna has been operating for over half a century. Today, it has 348 manufacturing operations and 91 product development, engineering, and sales centers in 28 countries around the world.
Last month, the company declared a quarterly cash dividend of $0.365 per share. This represented a 10.6% increase from Magna’s previous dividend payment of $0.33 per share. (Source: “Press Release – Magna Announces Fourth Quarter and 2018 Results and Raises Quarterly Cash Dividend by 11%,” Magna International Inc., February 22, 2019.)
Trading at $52.59 per share at the time of writing, the automotive supplier offers investors an annual dividend yield of 2.78%.
Getting Paid More Every Year
Now, as I mentioned, a few percent of dividends probably won’t seem like much in a bull market. But here’s the thing: because of Magna International Inc.’s ability to consistently raise its payout, investors who held MGA stock over the years get to enjoy much higher yield-on-cost than when they bought it.
In March 2013, Magna was paying quarterly dividends of $0.16 per share (split adjusted). Because the stock was trading at around $28.00 apiece, investors who bought MGA shares in March 2013 locked in an initial yield of around 2.3%. Not exactly a high number.
But because the company raised its payout every year—to the current rate of $0.365 per share per quarter—those investors are now collecting a yield-on-cost of 5.2%. That’s substantially better than what they did when they first bought the stock six years ago.
Looking further back, you’ll see that since 2010, Magna has increased its dividend every single year. (Source: “Dividends,” Magna International Inc., last accessed March 4, 2019.)
If you are wondering whether those dividend hikes were too aggressive for a company operating in the automotive industry, don’t worry; despite those sizable payout increases, Magna International Inc. has left a wide margin of safety in its dividend policy.
In the fourth quarter of 2018, Magna International Inc. generated $10.1 billion in sales, up five percent year-over-year. Adjusted earnings per share improved three percent from a year ago to $1.63, which easily covered the company’s quarterly dividend payment of $0.33 per share.
For the full year, Magna’s sales grew 12% to $40.8 billion, marking a new record for the company. The automotive supplier also grew its adjusted earnings per share by 13% to $6.71 in 2018.
And since Magna declared and paid total dividends of $1.32 per share in 2018, it achieved a payout ratio of just 19.7%.
As a rule of thumb, I like to see companies paying out less than 75% of their profits so that even when business slows down, there could still be enough profits left to cover the dividends. With a payout ratio of less than 20%, Magna’s dividends were more than safe.
Mind you, paying a dividend is not the only way through which Magna returns cash to investors; the company is also buying back its shares.
In 2018, Magna spent $1.83 billion repurchasing 32.6 million shares of the company. By reducing the number of shares outstanding, Magna’s stock buyback program allows each existing investor to own a slightly larger portion of the company. (Source: “Press Release – Magna Announces Fourth Quarter and 2018 Results and Raises Quarterly Cash Dividend by 11%,” Magna International Inc., February 22, 2019.)
The Bottom Line on Magna International Inc.
Usually, when a company delivers this kind of value to investors, its stock would be very expensive. But that’s not the case for MGA.
In fact, trading at $52.90 per share, Magna has a price-to-earnings (P/E) ratio of 9.74 times, which is substantially lower than the average P/E of 17.88 times for the auto, truck, and motorcycle parts industry. Meanwhile, its price-to-sales and price-to-cash-flow ratios are also much lower than the industry’s averages. (Source: “Magna International Inc. (MGA),” Reuters, last accessed March 4, 2019.)
Quality items seldom go on sale. For investors looking for solid dividend growth stocks on the cheap, Magna International Inc. could be an opportunity.