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4 Safe Dividend Auto Stocks That Should be on Your Watchlist
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The auto sector, being consumer cyclical, is dependent on business cycles and economic conditions. While the U.S. economy is growing at a steady pace, many emerging economies like Brazil, India and China, among others, are witnessing a slowdown. This is weighing on the auto sector. Dwindling vehicle sales, fierce industry competition, trade tensions, mounting production, and R&D costs for a shift to electric and autonomous future are keeping margins under pressure for automakers.
Declining sales in China, which is the world’s largest auto market, is the key factor impacting the worldwide demand of car sales. Carmakers in China, which are battling an unprecedented slump amid economic slowdown concerns, are expected to witness a third straight annual drop in vehicle sales in 2020. Additionally, the coronavirus outbreak is likely to further dent China’s auto market. Tighter emission standards, increasing regulatory costs and soft market conditions are likely to impact European auto sales.
Dividend Investing in Focus
Amid the gloomy backdrop gripping the auto sector, stock picking is a risky game. With uncertainty ruling the markets, dividend investing, in general, is one of the most popular investing themes.
Investors love dividends and generally focus on dividend yield. As dividend yield is based on the stock’s price, lower share price indicates higher yield, making the stock attractive. Hence, before buying such a stock, one must ensure that it is not a dividend trap.
It is imperative to ensure that those payouts are affordable and sustainable. Dividends are usually paid out of a company’s’ profits. Hence, if a firm is paying more than what it earns, the chances of a dividend cut is higher. Therefore, companies that are witnessing consistent earnings growth generally make the best dividend stocks, with sustainable and increasing payouts.
Also, one must take into account the company’s debt levels. With significantly high level of global corporate debt, dividends might fall if corporates begin to conserve cash to service debt.
While there are several dividend stocks that could provide capital appreciation, honing in on stocks with a history of dividend growth leads to a healthy portfolio with greater scope of capital appreciation, as opposed to simple dividend-paying stocks or those with high yields.
Stocks that have a strong history of dividend growth belong to mature companies that are less susceptible to large swings in the market, and thus act as a hedge against economic or political uncertainty as well as stock market volatility. At the same time, these offer downside protection with consistent increase in payouts.
Picking the Right Way
Targeting dividend stocks and combining them with a Zacks Rank of less than equal to #3 (Hold), along with VGM Scores of A or B will likely ensure a steady stream of cash to your portfolio. Additionally, the stocks have a strong history of dividend growth. They have been recording fairly conservative leverage and positive average annual earnings growth over the past five years.
Looking beyond the familiar dividend stocks in the auto industry like Ford (F - Free Report) and General Motors (GM - Free Report) , whose attractive yields are encouraging but payouts do not appear too sustainable amid macro-economic headwinds, we focus on four stocks with strong dividend growth history. Although these stocks do not necessarily have the highest yields, they have an impressive dividend track record. Based on the stocks’ prospects, their payout appears affordable and safe. Notably, each of the stocks has announced dividend hikes in this month.
Our Choices
Penske Automotive Group (PAG - Free Report) : On Feb 12, the firm raised quarterly cash dividend to 42 cents a share. This marked the 35th straight quarter of dividend hike, underscoring the company’s commitment of returning capital to its shareholders.
Investors should note that Penske has boosted dividend by around 25% per year, on an average, over the last nine years. Currently, its dividend yield is 3.18%. Notably, the firm paid 30.1% of total profits as dividends in 2019. During the year, the company returned $305 million or 70% of income to its shareholders through share repurchase and dividends.
The auto retail giant is witnessing steady earnings improvement, with average annual EPS growth rate of 10% over the past five years. The company’s manageable leverage, strategic buyouts, enhanced digital capabilities and diversified business segments bode well for its prospects. As such, Penske appears to be a promising dividend stock. The company currently carries a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Group 1 Automotive, Inc. (GPI - Free Report) : On Feb 18, Group 1 raised fourth-quarter 2019 dividend by 3.4% sequentially to 30 cents a share. Currently, the company’s dividend yield is 1.1%. While the dividend yield is not so inspiring, it is to be noted that Group 1 displays a reliable payment history and has raised dividend in each of the last 10 years.
Last year, the company returned 12% of its income as dividends and share buybacks. While the payout ratio and dividend yield are low, the dividend seems very sustainable and leaves enough funds for reinvestment opportunities to boost earnings. It is to be noted that the company’s payout are covered by both profits and cash flow, and a lower payout ratio ensures a greater margin of safety.
It has been witnessing steady earnings improvement, with average annual EPS growth rate of 13.3% over the past five years.Group 1’s strong business execution of used vehicles and after-sales units are likely to drive the company’s top and bottom lines, going forward. Given strong earnings growth and the fact that it is paying out a low percentage of profits and cash flow via dividends, the dividend appears safe. The company currently carries a Zacks Rank #2 (Buy).
Genuine Parts Company (GPC - Free Report) : On Feb 18, Genuine Parts Company raised its 2020 dividend by 4%. Importantly, the auto parts company has paid dividend every year since its IPO in 1948, and 2020 marks the 64th consecutive year of hiked payouts to its shareholders. Currently, the dividend yield of the company is 3.17%.
It is one of the lesser known dividend aristocrats and pays out more than 50% of its profits as dividends, which is a fairly acceptable payout ratio. The company, which has a manageable leverage of less than 50%, has witnessed average annual EPS growth rate of 4.7% over the past five years. While earnings growth of Genuine Parts is relatively lower, the company’s dividends appear sustainable and the stock holds promise.
The firm’s strategic acquisitions to improve product offerings and expand geographical footprint are commendable. Buyouts of PartsPoint, Inenco and Alliance Automotive Group will bolster the company’s growth, going forward.Moreover, the firm’s efforts to streamline its portfolio through sale of the non-core business are likely to aid it to trim its leverage and use the proceeds to invest in growth projects. The company currently carries a Zacks Rank #3.
Lear Corporation (LEA - Free Report) : On Feb 6, Lear hiked quarterly payout to 77 cents from 75 cents, marking the ninth consecutive annual dividend increase by the company. Currently, its dividend yield is 2.51%.
Lear has a relatively conservative payout ratio of around 22%, and its dividend is covered by both profit and cash flow. The firm has an average annual dividend growth rate of more than 20% over the past nine years. Lear, which has a leverage ratio of around 34%, has witnessed average annual EPS growth rate of 13.48% over the past five years. The dividend appears quite sustainable on the back of promising prospects.
Lear has differentiated itself from competitors by continued focus on innovation, luxury, and customization. The firm's Seating and E-Systems segments hold considerable growth opportunities. Lear’s acquisition of Xevo has bolstered its market position in connectivity. The company's 2020-2022 backlog stands at $2.7 billion, which is expected to drive revenue growth. The company currently carries a Zacks Rank #3.
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
Image: Shutterstock
4 Safe Dividend Auto Stocks That Should be on Your Watchlist
The auto sector, being consumer cyclical, is dependent on business cycles and economic conditions. While the U.S. economy is growing at a steady pace, many emerging economies like Brazil, India and China, among others, are witnessing a slowdown. This is weighing on the auto sector. Dwindling vehicle sales, fierce industry competition, trade tensions, mounting production, and R&D costs for a shift to electric and autonomous future are keeping margins under pressure for automakers.
Declining sales in China, which is the world’s largest auto market, is the key factor impacting the worldwide demand of car sales. Carmakers in China, which are battling an unprecedented slump amid economic slowdown concerns, are expected to witness a third straight annual drop in vehicle sales in 2020. Additionally, the coronavirus outbreak is likely to further dent China’s auto market. Tighter emission standards, increasing regulatory costs and soft market conditions are likely to impact European auto sales.
Dividend Investing in Focus
Amid the gloomy backdrop gripping the auto sector, stock picking is a risky game. With uncertainty ruling the markets, dividend investing, in general, is one of the most popular investing themes.
Investors love dividends and generally focus on dividend yield. As dividend yield is based on the stock’s price, lower share price indicates higher yield, making the stock attractive. Hence, before buying such a stock, one must ensure that it is not a dividend trap.
It is imperative to ensure that those payouts are affordable and sustainable. Dividends are usually paid out of a company’s’ profits. Hence, if a firm is paying more than what it earns, the chances of a dividend cut is higher. Therefore, companies that are witnessing consistent earnings growth generally make the best dividend stocks, with sustainable and increasing payouts.
Also, one must take into account the company’s debt levels. With significantly high level of global corporate debt, dividends might fall if corporates begin to conserve cash to service debt.
While there are several dividend stocks that could provide capital appreciation, honing in on stocks with a history of dividend growth leads to a healthy portfolio with greater scope of capital appreciation, as opposed to simple dividend-paying stocks or those with high yields.
Stocks that have a strong history of dividend growth belong to mature companies that are less susceptible to large swings in the market, and thus act as a hedge against economic or political uncertainty as well as stock market volatility. At the same time, these offer downside protection with consistent increase in payouts.
Picking the Right Way
Targeting dividend stocks and combining them with a Zacks Rank of less than equal to #3 (Hold), along with VGM Scores of A or B will likely ensure a steady stream of cash to your portfolio. Additionally, the stocks have a strong history of dividend growth. They have been recording fairly conservative leverage and positive average annual earnings growth over the past five years.
Looking beyond the familiar dividend stocks in the auto industry like Ford (F - Free Report) and General Motors (GM - Free Report) , whose attractive yields are encouraging but payouts do not appear too sustainable amid macro-economic headwinds, we focus on four stocks with strong dividend growth history. Although these stocks do not necessarily have the highest yields, they have an impressive dividend track record. Based on the stocks’ prospects, their payout appears affordable and safe. Notably, each of the stocks has announced dividend hikes in this month.
Our Choices
Penske Automotive Group (PAG - Free Report) : On Feb 12, the firm raised quarterly cash dividend to 42 cents a share. This marked the 35th straight quarter of dividend hike, underscoring the company’s commitment of returning capital to its shareholders.
Investors should note that Penske has boosted dividend by around 25% per year, on an average, over the last nine years. Currently, its dividend yield is 3.18%. Notably, the firm paid 30.1% of total profits as dividends in 2019. During the year, the company returned $305 million or 70% of income to its shareholders through share repurchase and dividends.
The auto retail giant is witnessing steady earnings improvement, with average annual EPS growth rate of 10% over the past five years. The company’s manageable leverage, strategic buyouts, enhanced digital capabilities and diversified business segments bode well for its prospects. As such, Penske appears to be a promising dividend stock. The company currently carries a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Group 1 Automotive, Inc. (GPI - Free Report) : On Feb 18, Group 1 raised fourth-quarter 2019 dividend by 3.4% sequentially to 30 cents a share. Currently, the company’s dividend yield is 1.1%. While the dividend yield is not so inspiring, it is to be noted that Group 1 displays a reliable payment history and has raised dividend in each of the last 10 years.
Last year, the company returned 12% of its income as dividends and share buybacks. While the payout ratio and dividend yield are low, the dividend seems very sustainable and leaves enough funds for reinvestment opportunities to boost earnings. It is to be noted that the company’s payout are covered by both profits and cash flow, and a lower payout ratio ensures a greater margin of safety.
It has been witnessing steady earnings improvement, with average annual EPS growth rate of 13.3% over the past five years.Group 1’s strong business execution of used vehicles and after-sales units are likely to drive the company’s top and bottom lines, going forward. Given strong earnings growth and the fact that it is paying out a low percentage of profits and cash flow via dividends, the dividend appears safe. The company currently carries a Zacks Rank #2 (Buy).
Genuine Parts Company (GPC - Free Report) : On Feb 18, Genuine Parts Company raised its 2020 dividend by 4%. Importantly, the auto parts company has paid dividend every year since its IPO in 1948, and 2020 marks the 64th consecutive year of hiked payouts to its shareholders. Currently, the dividend yield of the company is 3.17%.
It is one of the lesser known dividend aristocrats and pays out more than 50% of its profits as dividends, which is a fairly acceptable payout ratio. The company, which has a manageable leverage of less than 50%, has witnessed average annual EPS growth rate of 4.7% over the past five years. While earnings growth of Genuine Parts is relatively lower, the company’s dividends appear sustainable and the stock holds promise.
The firm’s strategic acquisitions to improve product offerings and expand geographical footprint are commendable. Buyouts of PartsPoint, Inenco and Alliance Automotive Group will bolster the company’s growth, going forward.Moreover, the firm’s efforts to streamline its portfolio through sale of the non-core business are likely to aid it to trim its leverage and use the proceeds to invest in growth projects. The company currently carries a Zacks Rank #3.
Lear Corporation (LEA - Free Report) : On Feb 6, Lear hiked quarterly payout to 77 cents from 75 cents, marking the ninth consecutive annual dividend increase by the company. Currently, its dividend yield is 2.51%.
Lear has a relatively conservative payout ratio of around 22%, and its dividend is covered by both profit and cash flow. The firm has an average annual dividend growth rate of more than 20% over the past nine years. Lear, which has a leverage ratio of around 34%, has witnessed average annual EPS growth rate of 13.48% over the past five years. The dividend appears quite sustainable on the back of promising prospects.
Lear has differentiated itself from competitors by continued focus on innovation, luxury, and customization. The firm's Seating and E-Systems segments hold considerable growth opportunities. Lear’s acquisition of Xevo has bolstered its market position in connectivity. The company's 2020-2022 backlog stands at $2.7 billion, which is expected to drive revenue growth. The company currently carries a Zacks Rank #3.
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>