Penske Automotive Group: Growth, Value and Dividend Growth Hiding in Plain Sight


Finding attractive investments in the dividend growth space has become a real challenge in today’s overheated market. This is especially true if you limit yourself to looking in the obvious places. Simply stated, you won’t find any bargains today in the Procter & Gambles, Johnson & Johnsons and Coca-Colas. In other words, the flight to quality and quest for yield has driven the classic Dividend Aristocrats and Champions to lofty valuation levels. Perhaps even more importantly, you won’t find a lot of growth potential with the blue-chip stalwart dividend growth stocks either. Here I am referring to both capital appreciation potential and dividend growth.

Nevertheless, my primary investment focus today is searching for attractive valuation, above-average current yield, dividend growth and some long-term capital appreciation potential. Since I am not finding any of those attributes by looking in the obvious places, I had to broaden my search. My willingness to look beyond the obvious places also stems from my belief that it is a market of stocks and not a stock market. This belief suggests that regardless of whether we are in a bull market or a bear market, there will always be attractive stock investments to be found. Today’s bull market is proving to be no exception.

Penske Automotive Group looks like a very attractive investment opportunity with an above-market current yield, low valuation and above-average growth potential. Since I currently consider these to be the most important attributes to attract my interest, I feel this mid-cap dividend growth stock is worthy of a closer look. Therefore, with this article, I will share what I have learned about this company so far. My research and due diligence process is not yet complete, but I am very intrigued by what I have discovered thus far.

Penske Automotive Group (PAG)

Simply stated, Penske Automotive Group operates numerous premium auto dealerships throughout the world. In 2016, North America provided 60% of their revenues and the U.K. 32% with the remaining 8% from other international markets such as Australia and New Zealand. Over 93% of their worldwide revenue comes from retail automotive, 5% from retail commercial truck and the remaining 2% from commercial distribution and other.

However, I found their revenue mix and profitability both balanced and interesting. As the slide below depicts, 51% of their revenue is derived from new auto sales, 30% from used auto sales and 10% from service and parts. But what I found more interesting was that 42% of their profitability came from service and parts. This struck me as a stable base for profitability because warranty work on new cars go through the dealership, and owners of premium vehicles tend to keep using the dealer for service after the warranty expires.

Another area that I feel bring stability and growth potential is the fact that 72% of its retail automotive dealership revenue comes from premium brands. This suggests that they deal with a more affluent customer that is less likely to be as affected by recessions or weaker economies. The following slide breaks down their revenues by brand.