Gentex Announces Dividend Hike: Can It Maintain Its Payout?

Bringing in pleasant news for investors, Gentex Corporation (NASDAQ:GNTX) recently announced a 4% increase in quarterly dividend, marking the 10^th consecutive year of payout hike. The move is indicative of the company’s commitment to create value for its shareholders and underlines its confidence in business growth. The revised quarterly dividend of 12 cents per share will be paid out on Apr 22, 2020, to stockholders of record as of Apr 10.

Consistent and Sustainable Dividend Payout

Currently, the company’s dividend yield is 1.86%. While the dividend yield is not so inspiring, it is to be noted that Gentex displays a reliable payment history. Gentex has a relatively conservative payout ratio of around 28%. While the payout ratio and dividend yield are rather low, the dividend seems very sustainable and leaves enough capital to fund reinvestment opportunities to boost earnings. It is to be noted that the company’s payout is covered by both profits and cash flow, and a lower payout ratio ensures a greater margin of safety.

The companies recording consistent earnings growth generally make the best dividend stocks, with sustainable and increasing payouts. The leading global supplier of automotive mirrors is witnessing steady earnings improvement, with average annual EPS growth rate of around 12% over the past five years. Moreover, the company’s earnings are expected to grow 6.02% and 6.63% year over year in 2020 and 2021, respectively.

One must take into account the company’s debt levels and financial position when gauging the sustainability of payouts. Strong balance sheet and cash flows support Gentex’s traditional practice of returning cash to its shareholders through dividend payouts and share repurchases. Gentex’s clean balance sheet with high cash balance and almost no debt underscores its healthy financials. Notably, in 2019, the firm returned around $450 million to its shareholders via dividends and stock buybacks.

Solid Fundamentals to Aid Gentex in Maintaining Dividend Hike

The year 2019 was a tough one for the auto industry amid lower vehicle production due to macro-economic headwinds and other challenges. Despite weakness in end-markets served, Gentex has been recording improvement in profits. The company managed to beat earnings estimates in each of the trailing four quarters. In fact, over the past year, shares of Gentex have gained 27% against the industry’s 20.5% decline.

The company expects fiscal 2020 revenues in the range of $1.91-$2 billion, indicating an increase from the reported figure of $1.86 billion in 2019. Gentex aims at creating long-term growth, driven by product launches, improved product mix and unique technology platforms. Technologically advanced products like Integrated Tool Module and HomeLink have significant growth avenues, going forward. The company is well positioned to cater to the emerging autonomous vehicle and connected vehicle space. Gentex is focused on developing dimmable devices that are powered with new technologies to cater to increasing demand for technically-advanced auto parts.

Given solid fundamentals, Gentex — with long-term earnings growth of 4% — stands tall in the tough auto industry. Given the tailwinds supporting the company’s track record of consistent growth, we believe that Gentex — which currently carries a Zacks Rank #3 (Hold) — is poised to enhance long-term shareholder value. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Recent Dividend Hikes by Other Auto Players

Other companies in the same sector that have raised dividends in the past month include Penske Automotive (NYSE:PAG) , Group 1 Automotive (NYSE:GPI) , Genuine Parts (NYSE:GPC) , Lear Corporation, Harley Davison and Volkswagen (DE:VOWG_p).

On Feb 6, Lear hiked quarterly payout to 77 cents from 75 cents, marking the ninth consecutive annual dividend increase by the company. On Feb 12, Penske raised quarterly cash dividend to 42 cents a share, marking the 35^th straight quarter of dividend hike. On Feb 18, Group 1 raised fourth-quarter 2019 dividend by 3.4% sequentially to 30 cents a share. On the same day, Genuine Parts raised 2020 dividend by 4%. On Feb 19, Harley Davidson announced quarterly dividend of 38 cents, marking an increase of 1.3% from the previous payout. On Feb 28, German auto biggie Volkswagen proposed a dividend hike to 6.50 euros per ordinary share.

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