These Stocks Are No Dividend Lemons

Investing In Automotive Dealership Dividend Stocks

 

A while back I wrote an article titled, “Drive Your Way Towards Dividends,” where I discussed how the average age of automobiles on the American road stands at 11.4 years. Driving our cars longer than ever before, I highlighted many of the dividend stock beneficiaries of this trend. Names such as Genuine Parts Company (GPC), Advance Auto Parts Inc. (AAP) along with Pep Boys – Manny, Moe & Jack (PBY) and O’Reilly Automotive Inc. (ORLY) benefited the most. Of course, car parts companies are just part of this automotive equation. As the effects of the great recession took hold upon the American consumer other segments of the car trade also stood to benefit, namely the auto dealership industry. As credit and cash strapped consumers increasingly looked for automotive bargains used car sales jumped 4.4% from 2011 to 2012 causing a boon for the auto dealerships as margins on sales of used cars are much higher than sales of new cars. In fact, Warren Buffett, capitalizing on this trend, just announced earlier this year that Berkshire Hathaway is buying Van Tuyl Group, the fifth-largest car dealership company in the U.S. If that’s not an endorsement of the sector then I don’t know what is. With that being said, let us examine some of the dividend paying auto dealership stocks that might add a little diversity to your dividend portfolio.

 

 

Penske Automotive Group, Inc. (PAG), is a name that is very familiar to most people in the U.S. Operating as an automotive retailer, PAG sells new and used motor vehicles of approximately 35 brands in the U.S. and United Kingdom. Currently yielding 1.80% with a moderately low payout ratio of 25.7% based on an EPS of 3.16, PAG also has a very impressive ten year annualized dividend growth rate of 28.63%. With a current PE of 15.6 and a forward PE of 13.2, PAG is priced well below its peers and the S&P and has plenty of room to continue to grow its dividend.

 

Next is Lithia Motors Inc. (LAD). LAD operates as an automotive franchisee and retailer of new and used vehicles in the U.S. Besides for selling new and used vehicles, LAD also provides maintenance, warranty, paint and repair services via its network of 96 stores. LAD currently yields a small 0.74% with a equally small payout ratio of just 13.1% making this dividend quite safe based on an EPS of 4.62. Though cutting its dividend back in 2008, LAD has been consistently raising it since and still sports a pretty impressive ten year annualized dividend growth rate of 10.79%. With a current PE of 18.8 and a forward PE of 14.9, LAD is pretty much on par with the market in general and close to industry peers.

 

Another name in the auto dealership space is Group 1 Automotive Inc. (GPI). Just as PAG and LAD before, GPI operates as a new and used car dealership across Alabama, California, Florida, Georgia, Kansas, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York, Oklahoma, South Carolina, and Texas as well as internationally franchised in the United Kingdom and Brazil. Like LAD, GPI currently yields a small 0.85% and also has an incredibly small dividend payout ratio of just 13.7% based on an EPS of 3.62. By most measures, this dividend can be considered safe as well as one that has room to grow. The parallels to LAD continue as GPI also cut its dividend back in 2008 but has since been raising it every year and has a decent five year annualized dividend growth rate of 6.7%. From a valuation perspective, GPI has a current PE of 23.8 making it more expensive than peers and the market as a whole. It seems that share price has run ahead of earnings on this one. Forward PE is much lower at 14.1.

 

Finally, on our automotive dealership dividend list is Sonic Automotive Inc. (SAH). Operating 123 franchises in 14 states, SAH is involved in the sale of new and used cars, light trucks as well as offering warranties and financing services. SAH offers us the smallest of yields at just 0.37% with a microscopic payout ratio of 5.3% based on an EPS of 1.91. While not really known as a dividend grower one would expect that current dividend payments are safe with room for future increases. Having the lowest PE of the stocks mentioned earlier at just 14.2 with a forward PE of 12.5, SAH might seem cheap but I question future growth prospects on this one, at least initially.

 

There’s no question about the robust nature of the new and used car market in the United States. After all, something must have compelled Warren Buffett to jump into this segment earlier this year. The question then becomes which of the dividend payers are best suited for a dividend growth portfolio considering the relatively low yields these stocks carry and their future growth prospects.

 

Are any of these automotive dividend paying stocks on your radar or in your portfolio? Please let me know below.

 

Disclosure: Long NONE

Image courtesy of: Sira Anamwong at FreeDigitalPhotos.net

20 thoughts on “These Stocks Are No Dividend Lemons

  1. Nice list! GPC has been on my radar for a while, but rose above my buy price and hasn’t gotten back down. The other companies I am not familiar with. They do not operate in my area. Where I live cars are mandatory, our public transportation isn’t feasible to use for daily life and our neighborhoods aren’t walkable. I would imagine that the service shops do pretty well when Americans slow down new car purchases.

    Have you found a cyclical nature to these companies?
    ILG recently posted…December SaleMy Profile

    • Hi ILG,

      GPC is probably the most solid name of the automotive sector in terms of solid and reliable dividend payments. While this sector is definitely cyclical in nature in terms of car sales, service, financing and support, some names do remain steadfast in terms of the overall operations and maintaining cash flow. GPC is probably the first name that comes to mind. It is always interesting to watch the ebbs and flows of this sector as economic prosperity sometimes leads to supply constraints and drives the entire automotive sector higher while economic downturns characterized by oversupply and weak demand hurt the companies mentioned. Thank you for stopping by and commenting.

  2. Interesting list DivHut. I don’t have any of these on my radar, but would not mind adding one – especially PAG. Also I am surprised you did not include R (Ryder) to the list because they, like PAG, are probably best known for their rental services in the USA. However, I do not know if they franchise or sell their vehicles or any other equipment like PAG.

    Always good to see a new investment topic.

    Thanks for writing,
    – Dividend Gremlin

    • Hi DG,

      For this article I decided to highlight car dealerships exclusively. I did not include car auction companies nor rental/trucking companies such as R that you mention as I felt they are slightly outside the scope of the stocks listed. It’s an interesting sector to say the least that has its fair share of ups and downs like many others but is especially sensitive to general economic prosperity and interest rates as well. As you know, I’m always on the lookout for non-traditional sectors that might have a spot in my dividend growth portfolio. Thanks for commenting.

  3. Huh. I can legitimately say I’ve never heard of any of these (I only know Lithia very vaguely). For some reason, I don’t feel as if I could own them. They do appear risky, as car purchases do decline on significant downturns. More importantly to me, car dealerships are just … ew. In my experience, they are sleazy and unethical, willing to cheat you out of anything. I find them distasteful. Kind of funny: I will invest in fast food, tobacco, and guns without a second thought, but car dealerships of all things are too morally repugnant for me to consider. Weird world, this.
    DividendDeveloper recently posted…Recent Buy – BLKMy Profile

    • Hi DD,

      Unfortunately, many people share your mistrust and unappealing sentiment towards car dealerships. It’s funny that car salesmen and especially used car dealers have this stigma attached to them. While this sector is very sensitive to economic conditions and interest rates as well, there’s no denying the need and robust nature of these companies as most individuals and fleets are sourced at these dealerships mentioned in this article. While definitely not a “normal” sector to invest in, as a dividend growth investor, I thought it would be interesting to check out and see how these companies fare from a dividend perspective. Thank you for stopping by and sharing your thoughts.

        • Hi QYDJ101,

          We all know about the stigma attached to car dealerships and their salesmen. It’s unfortunate that the sector has that reputation. In any case, as I mentioned, the oracle himself, Warren Buffett, saw some great value in the sector by buying up the fifth largest auto dealership in the U.S. No matter how we feel about the salesmen and business, it’s still an industry that generates some serious cash flow. Thank you for stopping by and commenting.

  4. Keith,
    The pension I plan to retire on soon is from an automotive manufacturer, so I doubt that I will invest any further in the sector. Otherwise, I might look at GPC and PAG. Both are well respected names.
    Merry Christmas!
    KeithX

    • Hi KeithX,

      Good call on your part to diversify out of your industry. Too often you hear about individuals putting all their retirement eggs in their own company basket. GPC was probably the most solid pick of the bunch from a dividend perspective. Quite honestly, prior to writing this article I haven’t heard of most of these auto dealerships. I think it’s always a good idea to look for dividend ideas that are in less familiar sectors. You never know what gem you might find. Have a happy holiday too and thanks for commenting.

  5. None of these auto dealership stocks are in my watch list, which is a subset of David Fish’s CCC list. Only LAD and GPI appear in the CCC list as Dividend Challengers, both with 5 years streaks of dividend increases.

    I like your series of posts looking at groups of stocks that share a common feature. Hope to see more of them in future!

    Cheers
    FerdiS
    FerdiS recently posted…Goals for 2015My Profile

    • Hi FerdiS,

      The auto dealership sector is definitely a group that doesn’t get much media attention until Warren Buffett made his recent purchase of Van Tuyl Group, the fifth-largest car dealership company in the U.S. All of a sudden the sector becomes interesting. While only a handful make the CCC dividend growth list, some might still offer substantial dividend increases going forward as cash flow and very low payout ratios are more than enough to cover the distributions. Thank you for stopping by and commenting.

  6. Hey man, this is a real eye opener! I’ve not heard of any of these companies, even though some of them operate in the UK. I guess we are not as into cars as you guys are! Plus, I suspect the average age of cars on our roads is older. I drive a 1996 BMW, and I wouldn’t like to swap it for this year’s model!

    Thanks for the insight into this area, it’s unlikely I’d ever have looked into car dealerships as a potential investment without seeing it here.

    Cheers!
    M from theresvalue recently posted…Is P2P Lending Worth Doing?My Profile

    • Hi M,

      That’s what I aim to do with my articles, inspire others to at least look or consider dividend paying stocks beyond our core sector investments such as consumer staples, industrial, financial, energy and the like. There’s a whole world of relatively untouched sectors that offer dividends that rarely gets discussed. The automotive dealership space is definitely one of them even though the sector made headlines recently when Warren Buffett announced his purchase of the fifth largest auto dealership in the U.S. As always, I appreciate your comment.

  7. A good list, but the yield is way bellow my threshold in order to invest in these stocks for dividend income. I would do it if I were already invested in other stocks which have higher yield and still had enough money available to invest.

    The issue with this low yield stocks is that they would require a lot of capital invested to receive a decent dividend. It could be OK for beginning investors who have time to let the yield build up over time via dividend growth, but if you are too close to retirement, you would have to skip these stocks.

    With some listed stocks with a yield below 0.90 annually it doesn’t make sense invest in them for income. You get a better deal in a savings account or CDs plus savings accounts or CDs will protect you against principal value drop what may happen when you are in these stocks.

    I ran those stocks thru my valuation screener, and the only stock I would invest is LAD, which shows to be undervalued. It has a good dividend growth, but I still would consider it a growth play rather than dividend investing.
    Martin@hellosuckers.net recently posted…Which stocks to buy in 2015?My Profile

    • Hi Martin,

      While you have a point about investing in low yield stocks, especially for those who need current income, one cannot discount the dividend growth rates of these companies either. While none have a stellar long term dividend raise history, some might still be worthwhile investments from a growth perspective. I understand that not all dividend stocks are created equal, but it’s still fun to see what less common investment sectors are offering. As always I appreciate your comment.

    • Hi DFG,

      That’s one thing I found to be the case with pretty much all the stocks in this sector, low yield. I know many of the dividend growth bloggers are seeking higher current yield to build their dividend snowball which is why energy has been so hot in recent months but some of these names can offer pretty good dividend growth rates going forward. Personally, I’d like to see more of a growth history before investing in any of these names. Thank you for stopping by and commenting.

    • Hi Pullingmyselfup,

      Well the car part retailers have been doing quite nicely since the “great recession” as cash strapped consumers kept cars longer and opted to repair instead of replace vehicles. GPC has been the one outstanding dividend payer in the space. I thought it would be interesting to see how other aspects of the automotive supply chain compare which is why I took a look at the dividend paying automotive dealerships. Not much in terms of yield but maybe one or two interesting plays can be found. Thanks for commenting.

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