The Best Dividend Paying Auto-Parts Stocks
Nauman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For this article I've researched dividend paying companies in the Auto-Parts Industry. Also, to make sure I find the best gems, all three stocks mentioned in this article comply with the following criteria:
- Market Cap of more than 500 million and an average volume of at least 250K = Low Volatility = Low Beta
- Price greater than $10
- Cash per share and current ratio greater than 1.5 = Good Liquidity = Dividend Sustainability
- EPS growth for the next 5 years of more than 7.5% = Future increases in dividend are more likely, as it will be very manageable for the company
- DCF valuation discount of at least 20% = Earnings translating into cash flow
- Dividend Yield of at least 2.5% = Obvious
The company manufactures and markets electro-optical products for the automotive, and aircraft industries primarily in the United States, Germany, and Japan.
It has $4.15 per share in cash and long-term investments, no debt at all, and an expected EPS growth for the next 5 years of 11.5%. Analysts expect $1.32 in EPS for the next fiscal year, and the current stock price is 14.4 times that figure.
Impressively, it has similar margins on both EBITDA and operating cash flow in the mid 20s, and its enterprise value (after subtracting long-term investments) implied by the current stock price is only 7.1 times trailing EBITDA. With a free cash flow margin in the mid-teens, the company should be able to further increase its cash reserve by $1.05 per share next year. ** This will increase its total cash to more than $5.2 per share.
The company recently increased its quarterly cash dividend 8% from $0.13 to $0.14 per share. Gentex has a history of paying out a significant portion of its earnings in dividends -- approximately 50% -- and has cumulatively paid out approximately $525 million in cash dividends since 2003. Also, four million shares buyback remain authorized under the previously disclosed share repurchase plan.
Discounted cash flow valuation
I don't have much difficulty generating a model that points to 8%-10% long-term revenue growth at Gentex. I expect the company to grow its free cash flow at a 5%-7% rate for the long term. Discounting that back, it suggests a fair value of about $25.
The company is engaged in the development and supply of safety systems to the automotive industry.
It has $13.75 per share in cash and long-term investments, current ratio of 1.78 and an expected EPS growth for the next 5 years of 7.8%. Analysts expect $6.27 in EPS for the next fiscal year, and the current stock price is 10.85 times that figure, compared to peer average of 13 times.
With an EBITDA margin in the low double-digits and an operating cash flow margin of around 7%, it has an impressive cash flow generation, and when I look at the enterprise value (after subtracting long-term investments) implied by the current stock price, it is only 5.45 times trailing EBITDA, much lower than the rest of the industry. Backed by strong free cash flow, the company should be able to further increase its cash reserve by $3.85 per share next year. ** This will make future increases in dividend more likely.
The company recently declared a quarterly dividend to shareholders of 50 cents per share for the second quarter 2013, unchanged from the first quarter.
Discounted cash flow valuation
I'm comfortable with a long-term revenue growth outlook of mid single-digits on Autoliv. I expect the company to grow its free cash flow at a 2%-4% rate for the long term. Discounting that back, it suggests a fair value of about $84.
Genuine Parts Company
The company distributes automotive and industrial replacement parts primarily in the North America.
It has $2.6 per share in cash, current ratio of 1.94 and an expected EPS growth for the next 5 years of 8.2%. Analysts expect $4.71 in EPS for the next fiscal year, and the current stock price is 15.5 times that figure.
It has similar margins on both EBITDA and operating cash flow in the high single-digits, and its enterprise value implied by the current stock price is 9.9 times trailing EBITDA. Backed by strong free cash flow, the company should be able to further increase its cash reserve by $5.15 per share next year. **
The company recently increased its regular quarterly cash dividend by 9%. This increased the cash dividend payable to an annual rate of $2.15 per share compared with the previous dividend of $1.98 per share. Genuine Parts has paid a cash dividend every year since going public in 1948, and 2013 marks the 57th consecutive year of increased dividends paid to shareholders.
The company has also used its free cash flow for share buybacks. The share count has already fallen from 165 million in fiscal 2008 to 155 million at the end of 2012, and I expect this trend to continue.
Discounted cash flow valuation
I'm comfortable with a long-term revenue growth outlook of mid single-digits on Genuine Parts. However, I expect the company to grow its free cash flow at a 8%-12% rate for the long term. That will lead to a steep looking compound growth rate of more than 15% -- discounting that back, it suggests a fair value of about $94.
When the asset values do not move up and down in perfect synchrony, such a diversified portfolio will have less risk than the weighted average risk of its constituent assets. Therefore, to generate safe and stable income, investors should diversify their portfolio with different industries. Such portfolios are more stable and offer better risk adjusted returns in the long-term.
With impressive cash flows, and dividend yields of more than 3%, the aforesaid stocks in the Auto-Parts Industry offer investors a valuable source of regular income, as well as the potential for long-term capital appreciation -- and should definitely be part of your portfolio.
**(Before dividends and share buybacks).
Nauman Aly has no position in any stocks mentioned. The Motley Fool recommends Autoliv. The Motley Fool owns shares of Gentex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!