1 Magnificent Canadian Dividend Stock Down 40% to Buy and Hold Forever

Magna International is an undervalued dividend stock trading at a steep discount to consensus price target estimates.

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The stock market rally in 2023 was primarily driven by the tech sector. It suggests several companies across multiple sectors continue to trade at a much lower valuation, allowing you to buy the dip and benefit from sizeable gains when market sentiment improves.

One such top Canadian dividend stock trading 40% below all-time highs is Magna International (TSX:MG). The ongoing drawdown in this TSX stock has increased its dividend yield to 3.3%. Let’s see why I’m bullish on this blue-chip TSX dividend stock right now.

An overview of Magna International

Valued at $21.8 billion by market cap, Magna International is one of the largest automotive suppliers in the world. It has 344 manufacturing facilities and 104 product development, engineering, and sales centers across 29 countries.

Magna supplies systems and components to several large original equipment manufacturers. So, the company’s results depend primarily on car and light truck production numbers in markets such as North America, Europe, and China.

How did Magna International perform in Q3 of 2023?

Global light vehicle production rose 4% year over year in the third quarter (Q3), allowing Magna International to increase sales by 15% to US$10.7 billion in the quarter. Magna attributed top-line growth to the launch of new programs, its acquisition of Veoneer Active Safety and a strong U.S. dollar, which was offset by lower sales due to labour strikes and lower assembly lines as its Complete Vehicles business is undergoing a “program changeover.”

Magna International reported adjusted earnings per share of US$1.46 in Q3, an increase of 33% year over year. Its earnings growth was due to higher sales, cost initiatives, and lower input costs. Magna’s operating cash flows also rose by US$559 million to US$797 million in the quarter ended in September.

Magna International pays shareholders a quarterly dividend of US$0.46 per share. These dividends have risen by 7.8% annually in the last 30 years, showcasing the resiliency of Magna’s cash flows. A consistent increase in dividend payouts has increased the effective yield significantly.

For instance, an investment of $1,000 in Magna International stock would have allowed you to buy 82.50 shares of the company back in January 1994. It would have allowed you to earn US$16.5 in annual dividends, indicating a yield of 1.65%. Today, 82.5 shares of Magna International would help you earn US$151.8 in annual dividends, raising your yield to more than 15%.

Is Magna stock undervalued?

Magna International is also gaining traction in the electric vehicle production space. Last year, it announced a US$470 million investment in Canada, allowing the company to increase the manufacturing of battery enclosures for electric vehicles.

Magna expects to grow sales at a faster pace compared to the growth in light vehicle production. But it still has to navigate headwinds such as inflation, higher interest rates, and lower consumer spending.

Magna expects to end 2025 with a free cash flow of US$1.8 billion. If it is valued at 15 times forward cash flows, Magna International stock should rise over 40% in the next 18 months.

Analysts remain bullish and expect Magna International stock to gain over 23% in the next 12 months.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Magna International. The Motley Fool has a disclosure policy.

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