The automotive sector is not in the best shape right now. With auto sales around the world slowing down, all companies in this space are conserving cash. That is why when a company continues to pay a high dividend, you sit up and take notice.
Exco Tech (TSX: XTC) is a global components supplier for die-cast, extrusion, and automotive industries with operations and sales in seven countries. The company reported results for its third quarter of fiscal 2020 ended June 30, and it beat analyst expectations. It reported sales of $71 million, a drop of 41% from $119.9 million in the same period of 2019 and a net loss of $0.8 million for the same period.
Automotive sales fell 68% in Q3
Exco’s automotive solutions segment had a decrease of 60% in year on year revenue, dropping to $28.2 million for the third quarter compared to $42.9 million in 2019. Sales dropped sharply, because automotive production in key Exco markets through April and May were suspended due to the pandemic. Three out of four Exco plants suspended operations through the whole of April and most of May.
Total vehicle production levels in North America and Europe were down 68% in the third quarter. The massive decline was on expected lines, as this segment directly feeds into the cyclical auto sector. As the auto sector gets hit, its direct suppliers will feel the heat.
However, economic activity showed a marked improvement in June compared to May. All four plants were 75% operational toward the end of the quarter. The company expects OEM (original equipment manufacturing) activity to pick up pace through the rest of calendar 2020, which will lead to a modest decline compared to 2019.
CEO Darren Kirk said, “I think it is going to be a challenge to get the margins back to pre-COVID levels with only 75% of volumes. We are doing what we can to take costs out and improve the efficiency, but that gap would be too sizable to get that. But having said that, it would certainly be a big improvement from where we were in the latest quarter.”
The casting and extrusion segment fared much better than the auto solutions one. Revenue only declined 13% by $6.1 million to $42.8 million for the third quarter. A lot of products from this segment feed into critical industries like medical equipment, food and beverage packaging, and building materials for emergency facilities.
Exco has enough liquidity to pay dividends
Exco’s cash position was at a healthy $23.7 million on June 30. It said, “The company has stress-tested its financial and liquidity position. There’s significant cushion to bank facility covenants. As a result, the company will continue to make its dividend payments a priority.”
This is good news for investors, as it will pay out $0.38 as dividends for the year, giving it a healthy forward yield of 5.9%. Exco is one of the few companies that has increased its dividend yield every year for the last 15 years. Analysts have predicted an 11% increase in share price from current levels.
An investor should be looking at a +15% profit from their investment in Exco, after accounting for its juicy dividends.
