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Is This the Best Automotive Dividend Stock?

Daniel Miller, The Motley Fool

By now, most investors have heard that light-vehicle sales in North America are plateauing. And that development has caused many to hit the panic button, leading to big declines for stocks such as Ford Motor Company (NYSE: F) and General Motors (NYSE: GM), which are now trading at paltry P/E ratios and attractively high dividend yields. Ford currently yields 6.5%, while GM's lower 4.1% yield is still impressive.

But what if there was an automotive stock that didn't rely on light-vehicle sales, was also available at a cheap valuation, and had a dividend with an upside that most investors don't know about? Here's why PACCAR (NASDAQ: PCAR) is an intriguing business and might be the best automotive dividend stock -- provided you act by Dec. 12 (more on this in a moment).

PACCAR 101

Before we get to PACCAR's unique dividend and how investors can benefit, here's the core of the company's business and why investors can feel comfortable owning this automotive stock. If you have never heard of PACCAR, the company designs, manufactures, and sells light-, medium-, and heavy-duty trucks under its Peterbilt, Kenworth, and DAF brands. It also manufactures diesel engines and provides financial services. These aren't trucks subject to the plateauing light-vehicle market in North America, as Ford and GM trucks are. PACCAR's trucks are massive machines built for the construction industry and for hauling goods across the country, among other uses.

Two heavy-duty semi trucks parked.

Image source: PACCAR.

PACCAR offers investors a premium list of global brands, and it has consistently ranked as one of the largest builders of 18-wheelers. The company has also carved out a healthy niche with independent truck drivers, who are estimated to represent more than half the overall North American fleet. That matters because while some of PACCAR's competitors have sought out agreements with large fleet operators, those agreements come with lower margins since large fleets have more bargaining power. PACCAR has chosen to cater to the individual truckers, and also offers them financing help to purchase the big-ticket trucks.

One reason PACCAR has successfully developed consumer loyalty with independent truck drivers is its reputation for vehicles with a longer life span. According to Morningstar.com, PACCAR's trucks have a life cycle of nine years, roughly two years longer than its peers. That justifies its pricing premium and strong brand power, and explains its relationship with independent drivers, who value those extra years of product life.

PACCAR's third quarter emphasized just how good business is: The company reported a 14% increase in net sales and financial services revenue, a 35% increase in net income versus the prior year, record truck production, and record market share in Europe.

But perhaps the most intriguing reason to take a deeper look at PACCAR stock this month is its dividend.

A special reward

What's interesting about PACCAR is its hefty extra cash dividend. Let's take last year as an example: On Dec. 5, 2017, the company declared a $1.20-per-share extra cash dividend payable to stockholders of record as of Dec. 14, 2017 -- that compared with its $0.25 quarterly dividend during 2017.

And this year will bring a similar payout, with PACCAR announcing on Tuesday it would increase its current $0.28 quarterly dividend by 14% to $0.32. In addition, there will be a cash dividend of $2 per share payable on Jan. 4, 2019, to shareholders of record at the close of business on Dec. 14, 2018. That means that in order to receive the dividend, you need to have purchased the stock early enough to be treated as a shareholder of record on Dec. 14. Based on current exchange rules, the ex-dividend date for the special dividend should be Dec. 13, meaning that you need to buy the stock by the previous trading day -- Dec. 12 -- in order to get paid.

PACCAR's $0.32 regular quarterly dividend, a yield of 2.1% currently, isn't going to jump off the page if you are an investor searching for larger yields. But when you add in the $2 extra cash dividend to its $1.28 regular dividend, it essentially provides investors a 5.5% yield at current prices, and most investors remain unaware of this sleeping dividend giant! 

In a press release, executive chairman Mark Pigott said:

PACCAR has increased its regular quarterly dividend an average of 11% per year during the last 20 years. PACCAR has delivered annual dividends, including regular quarterly and extra cash dividends, totaling approximately 50% of net income for many years. PACCAR complements these cash dividends with stock repurchase programs. This consistent allocation of capital is an important part of PACCAR's shareholder returns.

Business is good, as shown by its strong third-quarter, and its special dividend provides incentive for investors to scoop up shares while they trade at a modest 9.6 P/E. To continue rewarding investors, the company will focus on using its strong balance sheet and profits to not only pay a special dividend, but to also invest in new and expanded facilities and innovative technologies in electric, hybrid, and other alternative-power trucks. And as e-commerce continues to boost the demand for shipping goods across the country, trucks will continue to haul much of the load.

Bar chart showing trucks haul 71% of freight

Image source: PACCAR's October third-quarter presentation.

If the company can continue to develop products that last longer than its competitors, and build on its premium-brand image, it will thrive. And thanks to its overlooked extra cash dividend, PACCAR might just be the automotive industry's best dividend stock.

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Daniel Miller owns shares of Ford and General Motors. The Motley Fool owns shares of Paccar. The Motley Fool recommends Ford. The Motley Fool has a disclosure policy.