The contribution room for the Tax-Free Savings Account (TFSA) has increased to $6,500 in 2023 from $6,000 in 2022. There are several benefits of investing in this registered account, as any returns in the form of dividends and capital gains are exempt from Canada Revenue Agency taxes.
So, the TFSA is an ideal account to hold a basket of undervalued dividend stocks as you can benefit from a steady stream of payouts as well as capital gains. Here are two such TSX value stocks TFSA investors can buy with $6,500 right now.
Linamar stock
Valued at a market cap of $4.31 billion, Linamar (TSX: LNR) is an advanced manufacturing company with two operating segments: Industrial and Mobility. Linamar’s sales were up 29% year over year at $2.29 billion in the first quarter (Q1) of 2023 compared to $1.77 billion in the year-ago period.
Linamar explained its sales in Q1 increased due to higher agricultural sales and an improvement in market share across core products. The acquisition of Salford Group also contributed to top-line growth in addition to higher access equipment sales and increased pricing.
Despite an inflationary environment, Linamar stock is forecast to increase adjusted earnings by 37.5% to $8.61 per share in 2023. Priced at 8.1 times forward earnings, Linamar stock is very cheap. It also pays shareholders an annual dividend of $0.88 per share, indicating a forward yield of 1.3%. These payouts have risen at an annual rate of 8.9% in the last 20 years.
Linamar deployed $162.7 million in capital expenditures, which is 7% of total sales. The company maintained that if it invests between 6% and 8% of sales in capex, its top line should grow by at least 10% annually.
Despite heavier capital expenditures, Linamar reported a free cash flow of $19.4 million in Q1, up from $3.7 million in the year-ago quarter. It also ended the quarter with $1.3 billion in liquidity and a net debt to EBITDA (earnings before interest, tax, depreciation, and amortization) ratio of 0.43 times.
Analysts remain bullish on Linamar stock and expect shares to gain 24% in the next 12 months.
Martinrea International stock
Martinrea International (TSX: MRE) designs, develops, and manufactures lightweight structures and propulsion systems for the auto industry. It reported record sales of $4.78 billion in 2022, an increase of 25.7% year over year. Its adjusted EBITDA also grew 62.4% last year while earnings per share stood at $1.76.
The company reported a free cash flow of over $78 million in the second half of 2022, allowing it to end the year with a net debt-to-adjusted EBITDA ratio of 1.95. Its stellar performance continued in Q1 with a record EBITDA of $153 million.
Martinrea generates 74% of sales from North America and 23.5% from Europe. Valued at a market cap of $1 billion, the company is valued at 0.2 times forward sales and 5.7 times forward earnings.
Analysts expect its adjusted earnings to rise from $1.76 per share in 2022 to $2.27 per share in 2023 and $2.72 per share in 2024.
Due to its compelling valuation, Martinrea trades at a discount of 46% to consensus price target estimates. Martinrea also pays shareholders an annual dividend of $0.20 per share, indicating a yield of 1.5%.
