The automotive sector is undergoing massive changes. For years, gasoline engines and the automotive cycle have been rather stagnant. Presently, technological revolutions such as self-driving cars, electric vehicles, and even the political landscape are providing opportunities for proactive auto-parts makers to capitalize on these developing trends.
Canada is home to several world-class auto parts producers. These companies have strong financial track records and provide investors with geographic diversification through international operations. In addition to being excellent companies with solid balance sheets, these companies pay decent dividends and often continue to grow those dividends over time.
Magna International Inc. (TSX:MG)(NYSE:MGA)
Magna is one of the largest auto parts manufacturers in the world. The company is focused on growth and innovation. The company consistently grows its business both organically, through acquisitions, and through strategic partnerships. Its partnership with Lyft to produce self-driving cars is just one example of the company’s ability to adapt and grow.
Magna has a long history of having excellent earnings reports, and the latest quarter was no exception. In Q1 2018, the company increased revenues by 21%. Earnings increased 12%, primarily driven by the aforementioned increase in sales revenue. Cash from operations also increased an impressive 26% year over year.
The auto parts maker has a solid balance sheet, with a substantial amount of cash on hand. Magna’s impressive financial results have allowed the automaker to both pay dividends and buy back shares over the past several years. Currently, Magna has a yield of approximately 2%, which will more than likely continue to grow in the future.
Linamar Corporation (TSX:LNR)
A much smaller company than Magna, Linamar has a history of results almost as impressive. Linamar is primarily focused on auto parts manufacturing but is also diversified into areas such as producing items for use in agriculture, energy infrastructure, and industrial applications.
In Q1 2018, Linamar continued to deliver with decent financial results. Overall sales increased by 14% year over year. Earnings increased by almost 12% over the same period. Out of all of its business segments, industrial increased earnings the most, improving by 63% over the previous year. This increase in earnings was primarily due to Linamar’s acquisition of MacDon, the agricultural company.
Linamar has also paid a dividend for years, although the stock currently yields less than 1% at current prices. Linamar also has not raised the dividend as regularly as Magna, although it did raise it by 20% as recently as March 2017. The dividend appears to be safe, though, given the financial strength of the company and the low payout ratio.
While each of these companies is excellent for the long term, I must offer up a word of caution. There is a general belief that we are nearing the end of the auto cycle. If true, it is possible that these stocks will decline in value during a prolonged reduction in auto sales. However, if you are a buy-and-hold dividend investor, these stocks will continue to reward you in the long run.
