It’s actually pretty hard to find a top blue-chip stock in Canada that’s underperforming right now. The TSX is trading near all-time highs, and every day the market seems to want to move higher.
For long-term investors, that’s a great thing. However, for investors in specific stocks such as Magna International (TSX:MG), it’s been a bit rougher sledding of late.
Shares of the Canadian industrial giant have declined 7% year-to-date, and are actually down more than 8% over the past five years. In other words, this stock hasn’t done much for many investors lately.
Let’s dive into why Magna has traded this way, and where the stock could be headed from here.
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Most recent earnings report leads the way
Investors are forward-looking creatures, and as such, many may choose to avoid listening too closely to recent news on any given stock.
That said, earnings matter. Magna’s recent Q1 earnings report highlighted some travails investors appear to be internalizing, including a revenue drop of 8% year-over-year. This decline was driven by a drop in light vehicle production, with most of these declines being seen in Europe and North America.
Currency headwinds have also hit the stock, which has seen its adjusted earnings per share drop from $1.08 in the same quarter a year prior to just $0.78 this past quarter. That’s not good for those looking for earnings-related reasons to buy the stock, with many expecting continued declines as the auto industry unwinds (thanks in part to higher interest rates around the world).
Valuation and dividend metrics
From a valuation perspective, there is certainly a lot to like about Magna’s 10-times earnings multiple. And with a dividend yield that’s now above 5% (thanks to a share price that’s been held relatively steady for years), there’s an income component to this story that may be intriguing to some investors.
That said, the company’s ongoing commitment to providing shareholder returns in the form of dividends and share buybacks may not be enough to offset recent concerns around earnings. Until industrial activity really does pick up in the U.S. and Europe, this is a story stock that may be heading toward a rough chapter.
Where is Magna headed from here?
Predicting where any stock is going to head over any timeframe is extremely difficult. In the case of Magna, my expectation is that this will be a rather boring one to watch, at least from a capital appreciation standpoint.
For those looking to buy Magna for its yield, I think there are worse options out there. And at the company’s current valuation multiple, there’s a strong argument to be made that there’s some undervaluation here to be explored.
That said, I’m also of the view that there are other dividend stocks yielding more than 5% which may be better bets in this current environment. It all depends on one’s individual investing goals, but this is one I’d recommend doing additional research on before jumping in with both feet.
