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