Despite the ups and downs of this volatile stock, Magna International (TSX:MG) has actually delivered total returns of approximately 10% per year in the last 10 years. This performance is market-beating. However, as an auto parts maker, Magna is sensitive to the economic cycle. Consequently, its business results, as well as its stock, could experience stormy downdrafts during recessions. So, investors should be aware of two things: the stock’s volatility and whether you have the temperament or investment horizon to ride through that volatility.
Volatile Magna stock
Just how bad is Magna stock’s volatility? Here are a couple of examples. In the recession triggered by the global financial crisis, Magna stock lost about 58% of its value from peak to trough. In the bear market triggered by the pandemic, the cyclical stock declined about 49% from peak to trough. However, subsequently, within two years, the stock quadrupled and tripled, respectively, from the bottom.
Of course, it’d be a strike of luck to buy shares at the very bottom. The point is, though, investors don’t need to necessarily buy at the very bottom to make good money. However, you do need to have the ability to ride through the volatility. That ability might come from knowing that you bought the stock at “low enough” prices. Or it might come from your position sizing.
For example, you might hold a small percentage of your portfolio in volatile Magna stock so you won’t be swayed by the day-to-day, month-to-month volatility. You might also have a strategy to accumulate shares to help you build a position and an exit strategy that helps you trade around the stock.
Dividend
Of the 10% total returns long-term investors got from Magna stock in the last decade, about 2.2% came from its dividend. Indeed, at writing, Magna stock offers a dividend yield of 3.5%.
Because of the cyclical nature of the business, it’s natural for investors to worry about Magna stock’s dividend safety. The company’s track record of dividend growth is not bad. It has maintained dividend increases for 13 consecutive years with an impressive 10-year dividend growth rate of 12.6%.
Investors should note that Magna stock’s dividend growth can be highly unpredictable, just like its profitability. For instance, its last dividend hike was only 2.2%. This low dividend hike makes sense because the company’s trailing-12-month payout ratio was close to 87%. After all, it had a meaningful cut of almost 61% in its earnings last year. Again, this is another example of its volatile earnings.
This is why the stock doesn’t command a high price-to-earnings ratio.
Valuation
The stock’s long-term valuation is about 10.7 times earnings. At the recent price of $71.25 per share, analysts believe the stock is discounted by about 19%. This means it has the potential to appreciate about 23% over the next 12 months.
What’s important to note is that the stock can trade at a higher multiple – north of 12 times earnings – during times of economic expansion, at which time it tends to experience double-digit earnings growth.
Investor takeaway
Magna stock is not the best stock for conservative investors because of its nature of having volatile earnings that lead to a volatile stock. However, it does have a good balance sheet. For example, S&P awards it a credit rating of A-, and it last reported retained earnings of almost $8.7 billion, which could cover about 16 years of its current dividend payments. Moreover, the company tends to maintain a low payout ratio during good times. So, when times get tough, it has wiggle room for a higher payout ratio that will hopefully allow it to protect its dividend.
