Shares of Magna International (TSX:MG) fell 8% last week as the car manufacturer reported its most recent earnings report. Yet despite increasing its dividend, the company still saw a drop in share price.
So, what happened? Let’s take a look and see if this gives investors in Magna stock an opportunity to buy, or beware.
What happened
First, the good news. The auto parts maker reported that the company would pay a quarterly dividend of US$0.475 per share, an increase from US$0.46 per share before earnings. This brings the total dividend up to US$1.90 per share on an annual basis.
The news also came as Magna reported that net income surged from US$95 million last year to US$271 million as of the most recent quarter. Furthermore, sales totalled US$10.5 billion, an increase from US$9.6 billion last year.
Yet during the third quarter, Magna stock gave guidance as to what investors could expect during the quarter. However, there was a negative impact after strikes brought down the company’s earnings. This coupled with the unfavourable impact of “commercial items,” higher launch costs, and acquisitions all caused the company to take a hit on earnings.
In fact, the company walked away with US$1.2 billion in net income, falling pretty far short of its estimates between US$1.55 and US$1.65 billion.
Investors not confident
Investors therefore might believe that the company continues to struggle when it comes to following through on its own guidance. And this became an important sticking point when looking at earnings last week.
Magna management reported that it now has guidance for 2024 and 2026. Its sales should increase, as well as net income. However, it’s unclear how much investors can really trust the company if they have missed earnings estimates in the past?
So despite having a high dividend yield, investors may also wonder: can the company afford to keep it up? After all, with costs climbing and the company touting higher costs as an issue, it’s unclear why the company would choose now to increase that dividend by a fair amount.
Bottom line
Magna apparently still has work to do when it comes to getting its costs under control. While the company continues to see sales increase around the world, it blamed a laundry list of issues for the higher costs.
What’s more, these issues don’t look like they’re suddenly going to disappear. Higher costs are here to stay; acquisition and divestiture costs are also an issue. What’s more, it remains unclear about how the company will lower these costs in the future, despite seeing cost-cutting measures already in place over the last year or so.
So sure, Magna stock offers a dividend yield now at 3.16%. It also trades at 15 times earnings, which certainly suggests it offers some value. However, there seems to also be issues with follow through. And frankly, that’s not something you want from a company you plan to invest in over the long term.
