2022-08-MGA-Dividend growth investors

Can MGA drive profit for a dividend growth investor?

Cyclical stocks driving gains for the dividend growth investor

While I do love my slow-and-steady dividend growth stocks as a dividend growth investor, there is also a place for entering the more risky plays at the ‘right price’ if it can be found. There are a number of more cyclical stocks that have reasonable dividend payment histories but which have cycles in their business success due to the industry they operate in. The key would be to get in when prices are cyclically lower and then get out when they are cyclically higher.

In this post, we will review MAGNA INTERNATIONAL INC (MGA:US) as a possible investment. The firm operates as a supplier in the automotive sector. It is large, with an 18b market cap and an “A-” S&P credit rating. It is a good, solid company with deep industry expertise and capability to supply within auto supply chains. They are able to create, design, engineer, and manufacture components and sub-assemblies for their automotive customers. As such, it presents a good opportunity for the dividend growth investor willing to watch carefully and get in and out.

Dividends

The company has paid dividends for decades, yes, but not always increasing the amount. They currently have been increasing the dividends since 2015. They currently have a yield of 2.81% with a five-year DGR of 6.15% (Source: Seeking Alpha). So – reasonable.

Prospects for growth

This is a cyclical company. To get a good return we really need to get a good entry point. Based on Figure 1, we can see that the prices have recently been lower and are now trading at a slightly elevated level compared to the normal expected PE line (in blue). The EPS forecasts from analysts shown suggest that 2023 will be a good year with a substantial (nearly 50%) increase in the EPS. This seems to relate closely to analyst expectations elsewhere. Even a lower end EPS estimate I have from Finbox.io shows a EPS estimate of $6.42, which is lower than the $7.07 shown in Figure 1, but it is also a reasonable jump from the 2022 EPS estimate. So, there seem to be reasons to expect a reasonable EPS jump which will be useful for the dividend growth investor.

If we take the expected level (the blue line) in 2024 and run the calculations with FastGraphs, we can see a total annualized rate of return of about 20%, representing about a 50% overall rate of return. We expect the dividend to continue to grow and we can see an expectation of the dividend reaching approximately $2.06/share in 2024.

2022-08-MGA-dividend growth investor
Figure 1. MGA-dividend growth investors near-term forecasts of earnings based on analysts’ estimates. (Historical Graph – Copyright © 2011-2022, F.A.S.T. Graphs™ – All Rights Reserved.)

Valuation and margin of safety

Clearly, there are many ways of valuing the company. Finbox.io provides a range of model. The average they provide is a $78 fair value price (average of 14 different auto-generated models), but with a very wide range of between $54 and $100.  There is some level of value here, but, as we can see from Figure 1, MGA does not appear to be trading at a steep discount or with a substantial margin of safety here. Even the range of valuation models on Finbox.io provides indications of methods of valuing the firm at lower levels. All in all, the dividend growth investor here does not have security of dividends nor do they have a strong margin of safety.

Final thoughts

Right – so there is a good year ahead, based on the analyst forecasts of EPS values in 2023. For that to be a good year, the firm will still need a good economic environment and robust economic growth as opposed to a recession. If there *is* a recession on the horizon, this forecast will be toasted.

While we may expect nearly a 20% annualized rate of return (Figure 1), this is less likely to materialize and we are at risk of dividend cuts if there are economic challenges. The firm does not have a terrific history of protecting the dividend during tough times.

Given that this is not a particularly safe dividend – one that I can hold for years – this is just a ‘hold’ for me at this price.

If the price was to decline to a lower level, say about $55, as it was for a limited time in June, this would be a more attractive entry point. Will it reach this point again? I am not sure – but I will be keeping an eye out for it!

 

Cyclical stocks driving gains for the dividend growth investor While I do love my slow-and-steady dividend growth stocks as a dividend growth investor, there is also a place for entering the more risky plays at the ‘right price’ if it can be found. There are a number of more cyclical stocks that have reasonable dividend…

Cyclical stocks driving gains for the dividend growth investor While I do love my slow-and-steady dividend growth stocks as a dividend growth investor, there is also a place for entering the more risky plays at the ‘right price’ if it can be found. There are a number of more cyclical stocks that have reasonable dividend…

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