Gentex: A Robust Dividend Stock
Looking for a dividend stock with perfect GuruFocus ratings for financial strength and profitability? Meet Gentex Corp. (NASDAQ:GNTX).
At its current price of $24.76, it has a dividend yield of 1.94% and it has grown its dividend payments by an average of 8.2% per year over the past 10 years.
Warning! GuruFocus has detected 3 Warning Signs with GNTX. Click here to check it out.
10-K for 2019, Zeeland, Michigan-based Gentex described itself this way: "The Company designs, develops, manufactures, markets, and supplies digital vision, connected car, dimmable glass, and fire protection products, including: automatic-dimming rearview and non-dimming mirrors and electronics for the automotive industry; dimmable aircraft windows for the aviation industry; and commercial smoke alarms and signaling devices for the fire protection industry."
Rearview mirrors that dim automatically are its biggest line of business, making it a part of the auto industry and subject to that industry's cyclical performance. With fewer buyers in showrooms and some disappointment with its first-quarter 2020 earnings report, investors have bid down its share price, as shown in this 10-year chart:
The disappointment reflected the reduced level of activity in March, while January and February had been solid. Gentex pulled its revenue guidance for 2020, given the current situation.
However, the automotive slump may be relatively short-lived. Automotive News ran a news story on April 8 with this headline: "Quick rebound in Wuhan car sales give hope to battered industry." In the article, it noted, "In Wuhan, a city of 11 million, dealerships have been back in business for only a couple of weeks yet staff at some of them say daily sales have rebounded to pre-crisis levels."
Wuhan, of course, was where the Covid-19 virus emerged and was the first city to be shut down. It began its recovery just as Europe and North America became deeply entangled with the virus. Whether or not it will be the model for recovery in the auto industry is still an unanswered question.
In any case, Gentex considers itself ready to get through the current health and economic crises and to outperform on the other side whenever it comes. Commenting in the first-quarter earnings report, CEO Steve Downing wrote, "We remain optimistic that we can continue to provide above market returns for our shareholders by leveraging our current product strategy and through the execution of our lean organizational structure, which provides the speed and agility necessary to respond quickly to and manage through this new business environment".
Within that context, let's look more closely at the fundamentals. First, I wrote about Gentex just over two years ago, and at that time reported the company had been under pressure from short sellers. They were concerned about capital allocation practices, and Gentex had agreed to make changes. In response, short sellers mostly stayed away:
There was also some concern at that time about the entry of Magna Mirrors, a subsidiary of Magna International (NYSE:MGA). It would have challenged Gentex's strongest segment, auto-dimming mirrors. However, in the 10-K for 2019, filed in February, Gentex reported its market share had actually risen to 94%, up from 93% in 2017.
Turning to the fundamentals, we see:
The company has no debt. As many others have observed, a company with no debt is unlikely to go bankrupt. That's confirmed by the Altman Z-Score, which is almost as high as it can get.
Its return on invested capital of 26.1% is more than triple its weighted average cost of capital at 7.11%. That means the company earns significantly more than its cost of capital, making it profitable.
On the profitability table, its margins, return on equity and return on assets are all well into the double digits.
Revenue and Ebitda (earnings before interest, taxes, depreciation and amortization) are all strong (although not as strong as previously because of pullbacks in the last month of the first quarter).
It pays a dividend of just under 2% based on the current price, and Gentex has increased it every year for the past 10 years.
The dividend payout ratio is good at 32%, and its median over the past 10 years was 33%. We can make a couple of conclusions based on that information. First, the dividend is quite safe. And second, that the company is still pouring much of its free cash flow into product development and expansion.
It has been buying back its own shares at a modest rate, thereby increasing the earnings per share.
Gentex is also suitably priced. Over the past five years, the share price dropped from the low $30s to the mid-$20s. This screenshot of the discounted cash flow calculator shows that this dip is significant, providing a margin of safety of more than 40%:
Given the company's research and development focus--it increased its research and development budget from $107 million to $115 million in 2019--it should able to maintain its healthy growth in the medium to long term.
Conclusion
Gentex is a high-quality company on sale at a discount price due to a combination of internal and external circumstances. It has robust fundamentals, including no debt, that indicate management is doing a good job. Given its current pricing, it is worth a serious look by value investors.
Disclosure: I do not own shares in any companies named in this article and do not expect to buy any in the next 72 hours.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 3 Warning Signs with GNTX. Click here to check it out.
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