Buy Magna for capital gains and growing dividends

Canadian global manufacturing stock Magna International should earn record profits this year and next. This, plus a solid balance sheet and growing cash flow, gives it the means to raise your dividends and buy back shares. It remains a buy for share price gains plus decent and growing dividends.

Global_Manufacturing_StockWe regularly review Greater-Toronto-based manufacturing stock Magna International (TSX—MG; NYSE—MGA). Since we published our March 24 issue, its shares have risen by 3.2 per cent. The company is expected to earn record profits this year and next. That will give it the money to keep on raising your dividends and buying back its shares. Magna remains a buy for further long-term share price gains as well as decent and growing dividends.

Magna is “a leading global automotive supplier with 321 manufacturing operations and 102 product development, engineering and sales centres in 29 countries”. In the first quarter, North American sales came to $1.796 billion in Canada, $2.626 billion in the U.S. and $1.334 billion in Mexico (all numbers in US dollars unless preceded by a C). European sales came to $2.778 billion in Western Europe and $684 million in Eastern Europe. Its Asian sales were $640 million and, in the rest of the world, $126 million.

No wonder Magna adds the term ‘International’ to its name. This geographic diversification reduces its exposure to economic conditions in any one country. North America and Western Europe, however, are critical to the company’s earnings. So the economic upswing in both continents is a plus.

Magna is highly diversified

Magna is also diversified by product. It writes: “We have complete vehicle engineering and contract manufacturing expertise, as well as product capabilities which include body, chassis, exterior, seating, powertrain, active driver assistance, vision, closure and roof systems and have electronic and software capabilities across many of these areas.” This is another plus. That’s because car manufacturers prefer to deal with fewer, larger, suppliers. And Magna has the means to follow its customers anywhere.

In the first quarter, Magna earned $586 million, or $1.53 a share, for its stockholders. This was up by more than a quarter from $492 million, or $1.22 a share, a year earlier.

Magna’s sales (including eliminations) climbed by 5.3 per cent, to $9.372 billion. This outpaced the 4.1 per cent increase in its costs and expenses. Also, the company continued to buy back its shares. In the first quarter, it paid $100 million to repurchase 2.3 million shares. In the year to March 31, Magna reduced the share count by 19.8 million, to 383.4 million. The number of shares outstanding has fallen every year since 2010, when it peaked at 485.13 million. On June 28, the company was in a position to buy back up to 25,537,627 shares by November 14.

Magna will reward you in two ways

Magna is what’s known as a ‘dividend aristocrat’. It has increased its dividend each year since 2009. The current dividend of C$1.37 a share yields a decent 2.3 per cent. We expect the company to keep rewarding you with dividend increases and share buybacks. That’s because it has the means to do so.

Magna holds cash of US$831 million. And its net debt-to-cash-flow ratio is only 0.6 times. This is in our comfort zone of two times or less.

Magna’s first-quarter cash flow rose by 13.4 per cent, to $870 million. This greatly exceeded net investment of $250 million, dividend payments of $105 million and net buybacks of $94 million ($100 million less $6 million).

Magna is expected to earn record profits

In 2017, Magna’s earnings are expected to rise by 11.8 per cent, to C$7.18 a share. Based on this estimate, the shares trade at an attractively-low price-to-earnings or P/E ratio of 8.3 times. Next year, its earnings are expected to advance by 4.3 per cent, to C$7.49 a share. This works out to an even better P/E ratio of 7.9 times. Just keep in mind that P/E ratios are less useful in valuing cyclical auto-parts stocks.

The consensus recommendation of eight analysts is that Magna is a ‘buy’. We agree. Magna remains a buy for further long-term share price gains as well as decent and growing dividends.

This is an edited version of an article that was originally published for subscribers in the August 11, 2017, 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.
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