Magna International remains a buy. Its earnings per share are growing quickly. This gives the company the means to keep on raising its dividends every year.
We regularly review Greater Toronto Area-based Magna International Inc. (TSX—MG). Since we published our November 2, 2018 issue, its shares have risen by 2.2 per cent. The company is expected to earn more money this year and next.
This automotive supplier’s product groups include exteriors, interiors, seating, roof systems, body and chassis, powertrain, vision and electronic systems, closure systems, electric vehicle systems, tooling and engineering, and contracted vehicle assembly.
This should give this ‘dividend aristocrat’ the means to continue to raise your dividend. (In Canada, dividend aristocrats are companies that have increased their dividends for at least each of the latest five years.) Magna remains a buy for further long-term share price gains as well as attractive and growing dividends.
Magna has a diversified product offering
Magna “is a global automotive supplier which has complete vehicle engineering and contract manufacturing expertise, as well as product capabilities which include body, chassis, exterior, seating, powertrain, active driver assistance, electronics, vision, mechatronics and roof systems. Magna also has electronic and software capabilities across many of these areas.”
Car manufacturers prefer to do business with fewer, larger, suppliers. This works to the advantage of first-tier auto suppliers such as Magna.
In 2018, Magna earned record earnings and cash flow from record sales. Magna’s Body Exteriors & Structures is the largest of its four operating segments. In 2018, it generated total sales of $17.527 billion (all numbers are in US dollars unless preceded by a C). The segment’s adjusted EBIT (Earnings Before Interest and Taxes) was $1.398 billion.
And Magna is globally diversified too
Magna International is globally diversified. It operates 139 manufacturing plants in North America, 118 in Europe and 78 in the rest of the world. This reduces its exposure to any single country or region.
Magna also operates 96 product development and engineering facilities around the world.
Magna’s sales and earnings are climbing
Magna’s Power & Vision segment generated total sales of $12.321 billion and adjusted EBIT of $1.168 billion. The Seating Systems segment produced total sales of $5.548 billion and adjusted EBIT of $425 million. The Complete Vehicles segment generated total sales of $6.018 billion and adjusted EBIT of $68 million. The Complete Vehicles segment’s sales grew the most last year, up by nearly 70 per cent. But its profit margin is thin.
In 2018, Magna earned adjusted diluted earnings per share of $6.71 a share. This was up by 13.2 per cent from adjusted diluted earnings per share of $5.93 a share, the year before. This partly reflects the company’s buying back 32.6 million shares. It says that it returns about $2.3 billion to its shareholders through share repurchases and dividends.
In 2019, Magna expects its sales to total about $40.2 to $42.4 billion. This compares to sales of $40.827 billion last year. The consensus estimate of eight analysts is that the company’s earnings will leap by more than 36 per cent, to $9.15 a share.
The eight analysts also estimate that Magna’s 2020 earnings will climb by a further 13.2 per cent, to $10.36 a share. Divide by 0.7482 and you find that the company is expected to earn C$13.85 a share. Divide its share price by this estimate and you get an appealing forward P/E (Price-to-Earnings) ratio of less than 4.6 times. Just keep in mind that P/E ratios are of little use in valuing cyclical stocks such as auto-parts manufacturers.
Magna pays generous, growing, dividends
Magna now pays annual dividends of $1.46 a share. This translates into C$1.95 a share. This works out to an attractive yield of 3.1 per cent. Magna has increased its dividend in each of the last 10 years. It only reduced its dividend in the recession of 2008 and 2009. Generous and growing dividends could prompt income-seeking investors to bid up the price of Magna’s shares.
Magna remains a buy for further long-term share price gains as well as attractive and growing dividends.
This is an edited version of an article that was originally published for subscribers in the April 5, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846
The Investment Reporter •5/1/19 •