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2 Set & Forget Auto Retail Dividend Stocks Amid Inflation Woes

·6 min read

Are you exhausted of constantly tracking crucial financial news and taking long/short positions every now and then to get the most out of this unnerving stock market volatility? Then you should be targeting dividend-paying stocks, which would fetch you a steady income stream and provide extra cushion from drawdowns.

We recommend you add to your watchlist two promising dividend stocks from the Zacks Auto Retail and Whole Sales industry. The industry currently carries a Zacks Industry Rank #54, which places it in the top 22% of more than 250 Zacks industries. The industry is currently thriving, thanks to robust vehicle demand and high average prices of both new and used cars. But will the demand for vehicles continue to hold strong amid the economic slowdown? At this juncture, if you wish to stay invested in the auto retail industry, Penske Automotive PAG and Sonic Automotive SAH might just be the right picks for you.

The Road Ahead Is Uncertain

We know that the semiconductor shortage has put a lid on vehicle supply levels. Amid the chip crunch, the inventory level is rather low but that’s resulting in higher average transaction prices of vehicles. In light of the demand-supply mismatch, auto retailers are recording high vehicle margins, which are boosting their bottom line.

But the auto retail industry is a highly cyclical one. Consumers spend more on big-ticket items when they have higher disposable income. When income is tight, discretionary expenses are the first to be slashed. Considering the current economic slowdown, the demand for vehicles might just start cooling off.

With inflation at levels not seen in decades, the Fed has been forced to become more aggressive, cranking up borrowing rates. On Wednesday, the Fed jacked up interest rates by 75 bps for the third time in a row. The rising interest rates will increase the financing costs of vehicles. With borrowing getting expensive and threats of a recession looming large, consumers might be unwilling to pay a heavy premium for cars and demand may gradually soften. As demand abates, auto retailers may choose to slash prices to compete for customers, which could dent their bottom line.

Take Shelter in Dividend Investing

Monetary policy tightening, paired with geopolitical issues and supply chain bottlenecks, has created a challenging macroeconomic backdrop. The chances of the auto retail industry losing its ground is high as worries about a deep and wide recession in the United States in 2023 loom large. Amid the gloomy economic outlook, stock picking has become a risky game, and dividend investing has emerged as one of the most effective approaches to fight volatility as investors seek consistent and safe income.

Stocks that have a strong dividend track belong to mature companies and are less susceptible to large swings in the market. These stocks possess superior fundamentals such as a sustainable business model, a long track of profitability, rising cash flows, good liquidity, a strong balance sheet and some value characteristics that make them promising investments for the long term.

In particular, focusing on the growth level in this strategy leads to higher returns. Dividend growth stocks also offer downside protection with their consistent increase in payouts. Stocks with a strong history of year-over-year dividend growth form a healthy portfolio, with a greater scope of capital appreciation, as opposed to simple dividend-paying stocks or those with high yields.

Selection Criteria

Targeting dividend stocks and combining them with a Zacks Rank of less than equal to #3 (Hold), along with a VGM Score of A or B will likely ensure a steady stream of cash to your portfolio. Using the Zacks Stocks Screener, we have ensured that the selected stocks have a dividend yield of more than 2 and have also grown their dividends over the past five years. Plus, these have a sustainable dividend payout ratio of less than 60%, reflecting enough room for future dividend increases.

Although these stocks do not necessarily have the highest yields, they have an impressive dividend track record. Based on the stocks’ prospects, their payout appears affordable and safe. We have ferreted out companies that have consistently increased their dividend payouts and are well-established with successful business operations. As such, they carry a lower level of risk, undoubtedly a major positive for investors in the current uncertain macro-environment.

Our Choices

Penske: Penske engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. In 2021, the company hiked its quarterly dividend four times. So far this year, it has raised its payout thrice, hiking the quarterly dividend from 46 cents to 53 per share or up 15%. PAG’s annualized dividend of $2.12 per share represents a 2.05% yield.  Penske had an annualized growth rate of 8.48% over the past five years.Its payout ratio of 11 also looks quite sustainable. (Check Penske’s dividend history here)

Penske’s long-term debt-to-capitalization of 25% offers enough financial flexibility. In addition to the low leverage and lack of debt maturities anytime soon, Penske has over $1.1 billion in liquidity. The Zacks Consensus Estimate for PAG’s 2022 sales and EPS implies year-over-year growth of 8.5% and 19%, respectively. Penske surpassed earnings estimates in the trailing four quarters, the average surprise being 18%. The stock currently carries a Zacks Rank #3 and a VGM Score of A.

Penske Automotive Group, Inc. Dividend Yield (TTM)

Penske Automotive Group, Inc. Dividend Yield (TTM)
Penske Automotive Group, Inc. Dividend Yield (TTM)

Penske Automotive Group, Inc. dividend-yield-ttm | Penske Automotive Group, Inc. Quote

Sonic: Sonic Automotive is one of the largest domestic automotive retailers. The company is involved in the sale of new and used cars and light trucks, replacement parts, paint and collision repair services, as well as vehicle maintenance. SAH’s annualized dividend of $1 per share represents a 2.25% yield.  Sonic had an annualized growth rate of around 31% over the past five years. Its payout ratio of 11 also looks pretty safe. (Check Sonic’s dividend history here)

The RFJ buyout has substantially boosted Sonic’s portfolio and geographical footprint and has catapulted the company into the top-five biggest dealership groups in the United States. Sonic’s EchoPark unit is the major growth engine of the firm. The Zacks Consensus Estimate for SAH’s 2022 sales and EPS implies year-over-year growth of 25% and 18%, respectively. Sonic has a trailing four-quarter earnings surprise of roughly 11%, on average. The stock currently carries a Zacks Rank #3 and a VGM Score of B.

Sonic Automotive, Inc. Dividend Yield (TTM)

Sonic Automotive, Inc. Dividend Yield (TTM)
Sonic Automotive, Inc. Dividend Yield (TTM)

Sonic Automotive, Inc. dividend-yield-ttm | Sonic Automotive, Inc. Quote

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here


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