Wheeling and Dealing 2 Auto Dealership Dividend Stocks

Published Fri, 31 Oct 2015 22:30 CET by DividendYields.org

One of the most extensively used strategies of passive growth investing is selecting small- and mid- cap stocks with a strong growth potential. The main advantage of passive investing is that it allocates market risk over different assets, thus offsetting the losses of a dramatic market decline in a particular sector or company. On the other hand, passive investing cannot protect investors against broad market declines, as it follows the trend of the market. To anticipate market risk, investors should have an insight into growth prospects and be able to obtain better estimates of expected growth.
Small- and mid-caps with growing revenues and increasing margins are often good investment choices. Of course, there has to be an indication that will entice investors in selecting a particular stock, such as a revise in sales or cash flow, a geographic expansion or a new product line.
This article discusses two stocks that trade in the Auto Dealership Sector. By solely looking at their average dividend yield of 0.84% or payout ratio of 14.1%, one might consider not to invest in these stocks under the belief that they lack the potential of delivering results. However, their geographic diversity and their average annual earnings growth of 18.3% over the next five years might make dividend investors reconsider and add these stocks to their portfolios.

Group 1 Automotive and Lithia Motors YoY Stock Performance Graph
Group 1 Automotive (NYSE: GPI) is a Houston-based company that operates in the automotive retail industry and focuses in the sale of new and used vehicles, light trucks and vehicle parts, maintenance and repair, financing and insurance through its subsidiaries Currently, GPI’s network consists of 153 automotive dealerships, 200 franchises, 32 brands and 35 collision centers in several U.S States, in the U.K. and Brazil.
Q3 2015 results: GPI reported historic YoY quarterly revenues of $2.8 billion, up by 6.6% from $2.6 billion due to an increase in all areas of business. YoY new vehicle retail sales reached $4.16 billion, up by 2.2%, used vehicle retail sales reached $1.84 billion, up by 9.2%, service sales reached $835.6 million, up by 4.1% and finance and insurance revenues climbed to $289.3 million, up by 9.5%. The company has a well-balanced brand portfolio, mainly led by Toyota and Lexus (27%), followed by Ford (12%), which allows Group 1 Automotive to leverage the risk of changing consumer preferences. Q3 YTD new vehicles units are 173,327, and used vehicles units are 121,412. Expectations are that by the end of 2015, sales units will be significantly higher compared to 2014. Also, the results vary based on geographic diversity. Currently, GPI’s sales mix is U.S. 82%, U.K. 11%, and Brazil 7%, with U.S operations being up by 15.1%, due to the improved sales environment.
Dividend History: for the period 2006-2015, GPI’s dividend growth is 61.5%. 2015 YTD, Group 1 Automotive delivered a quarterly dividend of $0.21, reaching an annualized dividend of $0.84, whereas share repurchases are 850,000 shares are at an average price of $83.67.
2016 Outlook: GPI focuses on acquisitions that could return 10%-15% after-tax discounted cash flows. Additionally, the declining oil prices are boosting consumer discretionary income, while used vehicle prices remain competitive. Given GPI’s ability to capitalize on acquisition opportunities and expand its operations in the existing markets, analysts estimate an average EPS of $7.85 through 2017, up by 52.1% compared to the current EPS of $5.16, and an average annual earnings growth of 14.70% through 2020.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
Group 1 Automotive 86.95 74.45 97.34 16.79% -10.67% 2.06 16.59 1.12 1.42 16%
Lithia Motors 117.39 70.97 122.03 65.41% -3.79% 2.98 16.99 0.80 1.71 12%

Lithia Motors (NYSE: LAD) is an Oregon-based leading automotive franchisee and retailer that focuses on providing both urban and rural areas across the United States with a variety of new and used vehicles, replacement parts, vehicle maintenance, warranty, repair services, financing, vehicle protection and credit insurance.
Q3 2015 results: Lithia Motors reported net income of $53.6 million, up by 53.6% from $34.9 million in Q3 2014, achieving an historic net income high, whereas revenues skyrocketed to $2.1 billion, up by 61.6% from $1.3 billion in the same quarter last year. The upside in revenues was driven by enhanced performance across all the segments. New vehicle retail sales surged to $1.23 billion, up by 67.6% in the quarter. Revenues from used vehicle retail reached $505.9 million, up by 48.6% YoY. Revenues from used vehicle wholesale reached $69.5 million, up by 42.2% in the quarter. Revenues from service body and parts reached $189.8 million, up by 57.2%, finance and insurance segment surged to $76.6 million, up by 63.6% and revenues from fleet and other surged $15.98 million, up by 100%.
Dividend History & Stock Performance: Lithia Motors has significantly outperformed the market YoY by 53.36%. In terms of dividend payments, in the period 2003-2015, Lithia Motors has a dividend growth of 185.7%, which suggests that the company is consistently paying dividends to its shareholders.
2016 Outlook: Lithia Motors’ management has identified more than 2,600 stores across the U.S. as exclusive acquisition targets and strongly believes that it will achieve accretive purchases in the near-term in order to boost the company’s earnings and improve its portfolio. Analyst consensus estimates an average EPS of $8.10 through 2018, up by 21.6% from the current EPS of $6.66, and an average earnings growth per year at a rate of 21.98% for the next five years.