Magna International (TSX:MG) is a cyclical stock that experienced strong cuts in its earnings and stock price around the last two recessions. It’s not difficult to predict that it would likely report weak business results in the next recession.
It enjoys a solid S&P credit rating of A-. However, because of the cyclical nature of the auto parts manufacturing industry and the unpredictability of its business and outlook, it is generally considered to be a higher-risk stock.
The Magna stock typically experiences greater ups and downs than the market volatility. According to Yahoo Finance, its recent beta is 1.68 versus the market beta of one. Despite it being a volatile stock and experiencing a substantial correction from mid-2021, over the last 10 years, the stock still delivered total returns that were close to the Canadian stock market’s, as shown in the graph below. It follows that if you aim to buy low and sell high in Magna stock, you have the potential to beat the market returns.
MG and XIU Total Return Level data by YCharts
Notably, Magna stock is a Canadian Dividend Aristocrat that has increased its dividend by about 13 consecutive years. Its 10-year dividend-growth rate of 12.6% is nothing to sneeze at.
That said, it is a relatively higher-risk dividend stock. For instance, around the global financial crisis of 2007-08, it cut its dividend significantly in 2009. Management is committed to the dividend, though. As soon as earnings came back in 2010, it substantially recovered its dividend and restarted its dividend-growth streak. Investors must be prepared for bumpy dividend growth based on the macro environment as well as the outlook for the business.
The company generally maintains a low payout ratio to better equip it to protect its dividend (streak) through the ups and downs of the economic cycle. Its payout ratio is estimated to be about 35% of its adjusted earnings this year.
There’s always a probability of a recession happening in any given year. Economists have predicted a higher risk of a recession this year in the United States, a key market of global business, but the economic data in the U.S. remains strong.
In July, a Goldman Sachs article noted that “our economists say there’s a 20% chance of recession in the next 12 months, down from their projection of 25%.” According to Goldman’s research, “the probability of a U.S. recession in the coming year has declined, as recent economic data signal that bringing inflation down to an acceptable level will not require a downturn.”
It’s anyone’s guess when the next recession will actually occur, how severe it will be, and how long it will last. Since Magna International will be reporting its third-quarter results and likely provide an updated outlook, it could be smart of investors to wait another day to decide whether to invest in the stock.
You’ll probably be okay buying the stock here for a long-term investment, though. At $66.86 per share at writing, it trades at about 9.6 times its adjusted earnings this year, and it has the potential to grow at a double-digit rate over the long run, assuming that an economic expansion eventually follows a recession. At this quotation, the stock offers a dividend yield of 3.8% as well.
