The automakers do not look attractive in today's environment of the trade war, tariffs, and slowing global growth. Add to that an expected top in auto sales and you can understand why Kevin O'Leary said he wouldn't touch any of them (the automakers). He thinks it's a miserable space to be invested in - in ten years people won't care who makes their cars, assuming they even own them.
While this sentiment is a telling indication of the direction of the auto manufacturers, who are little more than assemblers of components, it does little to indicate the direction of auto parts makers. Yes, the automotive sector is a lackluster sector to be invested in, but autos, transportation, and the companies that literally keep the industry moving are not. The world's population is growing and moving, and it needs transportation.
The four companies on this list came up in a screen for the Technical Investor watch list. The watch list screens for dividend-paying stocks in sectors with the best outlook for earnings growth.
What these stocks share in common is membership in the automotive supply chain, an opportunity for diversification within an income portfolio, and a high expectation of dividend growth. On an individual basis, these stocks have other attractive qualities, like insulation from China and the trade war, exposure to the IoT, and global need.
|Stock||Ticker||Yield||Yrs Growth||Payout Ratio|
|Genuine Parts Company||GPC|| |
|Penske Auto Group||PAG||3.45%||8||29%|
Goodyear Tire & Rubber
Genuine Parts Company - Genuine Parts Company distributes automotive replacement, industrial parts and materials, and business products in North America, Australia, New Zealand, the United Kingdom, France, Germany, Poland, and Puerto Rico.
Basically, it aggregates and sells parts for just about any industrial need, including automotive, as well as servicing customers with maintenance and repair options. Even if the market for new equipment disintegrates, there will always be a market for replacement parts
It has been growing revenue at a steady clip since 2016, organically and through acquisition, and is expecting more of the same this year. The company's guidance calls for 3-4% revenue growth, not including the acquisition of Inenco Group, and that is likely low given strength in global activity (trade impact aside). The Inenco Group is Australasia's largest supplier of some key product groups and a strategic move for GPC. It will add an estimated $400 million in annual revenues.
In terms of dividend and dividend growth, this is a top-notch contender for any portfolio. The yield is a nice 3.12%, and the company has a long history of dividend increases. The dividend has been increased for 62 years, and the payout ratio suggests future dividend increases are assured. The payout ratio is a low 52.5% - not the lowest you will find, but plenty low enough to assure dividend safety, if not future increases.
Gentex - Gentex Corporation provides digital vision, connected car, dimmable glass, and fire protection products worldwide. It designs, develops, manufactures, and markets automotive products for automotive passenger cars, light trucks, pick-up trucks, sport utility vehicles, and vans for OEM, Tier 1 automotive mirror manufacturers, and various aftermarket and accessory customers.
In addition, it provides photoelectric smoke detectors and alarms, electrochemical carbon monoxide detectors and alarms, audible and visual signaling alarms, and bells and speakers for use in fire detection systems in office buildings, hotels, and other commercial and residential establishments.
The company just reported a consensus-beating quarter driven by increased sales and improved margins. The margin improvement is especially noteworthy, as it comes on top of price reductions for some key customers. While revenue and earnings growth has slowed in the past year, growth over the past ten years has been robust.
Looking forward, the coming quarter and year are expected to see the positive trend continue. The average analysts rating is only a "Hold", although the consensus estimates show >5% revenue growth this year and next.
The dividend isn't as substantial as Genuine Parts Company at 2.12% yield, but it is still attractive. The 16-year history of distribution increases and super-low 27% payout ratio make it even more attractive; dividend increases are expected, affordable, and sustainable.
Penske Auto Group - Penske Automotive Group, Inc. operates as a transportation services company. It operates through four segments: Retail Automotive, Retail Commercial Truck, Other, and Non-Automotive Investments. It operates automotive and commercial truck dealerships principally in the United States, Canada, and Western Europe; and distributes commercial vehicles, diesel engines, gas engines, power systems, and related parts and services primarily in Australia and New Zealand. The company also engages in the sale and servicing of third-party insurance, warranty, and maintenance contracts.
Penske just reported a less-than-stellar quarter, but weak results are expected to end with the past quarter. Looking forward, the coming quarter is expected to show strong quarter-to-quarter growth and at least flat-to-slightly positive YOY growth. The average analysts rating is a buy, but that fact is overshadowed by a series of EPS downgrades over the past month. Because the used car market is expected to see record-breaking sales this year, and because consumer confidence is thriving, I think Penske will easily top estimates.
The dividend is about as attractive as it can be. The yield is a high (relative to the S&P 500 average 1.85%) 3.45%. The company has an eight-year history of dividend increases, an 18% 5-year average distribution growth rate, and a low 29% payout ratio, so future increases are all but assured.
Goodyear Tire Company - The Goodyear Tire & Rubber Company, together with its subsidiaries, develops, manufactures, distributes, and sells tires and related products and services worldwide. The company offers various lines of rubber tires for automobiles, trucks, buses, aircrafts, motorcycles, earthmoving and mining equipment, farm implements, industrial equipment, and various other applications under the Goodyear, Dunlop, Kelly, Debica, Sava, Fulda, and various other Goodyear-owned house brands, as well as under the private-label brands
In my view, Goodyear Tire & Rubber Company is more of an infrastructure stock than not, and that is seen in its revenue. Regardless of new car sales, the total number of vehicles on the road grows at a much slower pace, and tire sales are guaranteed regardless of vintage. Everybody has to have tires.
Looking at Goodyear's revenues, you'll see net revenue on a year-over-year basis has run in a range between $3.7 billion and $4.7 billion, while car sales have been hitting record highs. I'm not knocking Goodyear; in fact, I like its infrastructure appeal - you can count on people replacing their tires in good times and bad, and the dividend is attractive enough it may soon halt the stock's long-term downtrend.
The dividend, at today's share prices, is a safe 4.50%. The company has a five-year history of dividend increases and a whopping 63% growth rate. The growth rate may signal management's desire to attract new shareholders, and if so, I'd say it's working. The payout ratio is a low 28%, so there is little fear of distribution cuts and even reason to expect a future dividend increase. Notably, there has been some insider buying, which shows Goodyear's own people want to ring this cash register.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.