Investing in undervalued dividend stocks is a proven strategy for generating outsized returns over time. You need to identify a basket of quality stocks that pay shareholders a tasty dividend yield while trading at an attractive valuation. Moreover, these companies should maintain and even increase the dividend payouts across market cycles, significantly enhancing the yield at cost. In addition to a steady dividend payout, investors are poised to benefit from long-term capital gains, too.
One TSX stock down 42% from all-time highs that also offers you a forward yield of 3.5% is Magna International (TSX:MG). Valued at $20.7 billion by market cap, Magna International designs and manufactures components, assemblies, systems, subsystems, and modules for original equipment manufacturers of vehicles and light trucks globally.
Let’s see why I’m bullish on the TSX dividend stock right now.
How did Magna International perform in Q4 of 2023?
Despite an uncertain macro environment, Magna International reported a record revenue of US$42.8 billion in 2023. Its sales rose by 9% year over year to US$10.5 billion, despite worker strikes at several automobile factories. According to Magna, these strikes reduced sales by US$275 million in the fourth quarter (Q4) and contributed to a negative vehicle production mix compared to the same period in 2022.
Its focus on cost optimization amid elevated inflation levels allowed Magna to increase adjusted EBIT (earnings before interest and tax) by 52% to US$558 million. Its EBIT margin improved by 150 basis points year over year to 5.3%.
Comparatively, adjusted earnings per share for Q4 rose 41% to US$1.33, while free cash flow rose over 30% to US$472 million. Magna International pays shareholders a quarterly dividend of $0.475 per share, which means it paid roughly $133 million in Q4 dividends, indicating a payout ratio of less than 30%.
A low payout ratio allows Magna to reinvest in organic growth, lower balance sheet debt, and raise dividends. While the automobile sector is fairly cyclical, Magna International has raised dividends by 13% annually in the last 17 years.
Is Magna International stock undervalued?
Magna International ended 2023 with US$12 billion in new business, which should contribute to top-line growth in the upcoming quarters. Analysts covering the stock expect sales to rise from US$42.8 billion in 2023 to US$46.6 billion in 2025. Its adjusted earnings are forecast to expand from US$5.49 per share in 2023 to US$6.1 per share in 2024.
So, priced at 8.8 times forward earnings, Magna International stock is really cheap, given that adjusted earnings are forecast to expand by 16% annually in the next five years.
Magna International forecasts organic sales growth between 3% and 5% in the medium term. Further, it expects a margin expansion of 180 basis points through 2026.
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The auto ancillary giant continues to invest heavily in megatrends such as electric vehicles, which should drive future cash flows higher. In fact, Magna emphasized its engineering investments in megatrends will average US$1.2 billion each year.
Magna International is a blue-chip stock trading at a compelling valuation while offering shareholders a growing dividend payout. Analysts remain bullish and expect the stock to surge over 18% in the next 12 months.
