This article is part of our weeklong series on 11 incredible dividend stocks. You can get the low-down on this series by clicking here.
Autoliv
The business
Autoliv's products fall into two primary categories. Airbags and assemblies represent nearly two-thirds of sales, and seat belts and related equipment make up the other third.
Seat belts are a slow and steady cash generator, while airbag innovations are driving growth. Today's airbags are far more comprehensive than the simple dash-mounts of a generation ago. They now come in ever-smaller and lighter steering wheel and dashboard models, "curtains" protecting against side impact, knee airbags preventing leg-crush injuries, and even under-seat bags that forcibly tilt you back during an accident so you can sit back and enjoy your crash. Future growth initiatives include night-vision systems (presumably for night-time joggers who insist on wearing black), exterior bumper airbags (keeping said joggers from disappearing under your front bumper), and integrated safety control systems.
Autoliv is exceptionally well-diversified both geographically and across all automakers, and has more than a third of the global safety system market, versus publicly traded TRW Automotive
And it's a business you can feel good about owning -- Autoliv estimates that its products save more than 25,000 lives annually, and prevent 10 times as many severe injuries.
| Company | Autoliv |
| Dividend Yield | 2.5% |
| 5-Year Dividend Growth Rate | 5.2% |
| Payout Ratio | 26.0% |
| Paying a Dividend Without Interruption Since | August 2010 |
Source: Yahoo! Finance; Capital IQ, a division of Standard and Poor's.
Why it's incredible
Investing in Autoliv means buying into an industry-leading business generating far more cash than it needs, with a management team obsessed with returning value to outside shareholders. Prior to the credit crisis of late 2008 and early 2009, Autoliv seemingly sought to return every dollar of free cash flow to shareholders via dividends and share repurchases. But management also impressed with their ability to make tough decisions when necessary. Here's an example.
In mid-2008, as the credit crisis revved into high gear, Autoliv halved, and then halted its dividend entirely. This was unsurprising. With the world financial system seemingly cracking, people stopped buying, well, pretty much everything, especially high-cost, externally financed automobiles. This was demonstrated most in Autoliv's first quarter of 2009, during which sales fell by nearly half.
Alongside the dividend cut, the company implemented a cost-cutting "action plan" that promised to supercharge profitability upon a return to any market environment not described as "petrified," and also buttressed its balance sheet. The stock price took the predictable kicking, but these combined moves allowed Autoliv to husband vital cash, making its own future safer.
Dividend strength
For years, Autoliv was a rising dividend rock star, nearly quadrupling its annual payout from 2002 through 2008. Moreover, the company generated so much cash that it bought back nearly a third of its shares outstanding from the start of the decade, although some of this payout was admittedly funded by increased debt.
Through the credit crisis, the company had only one quarter of negative cash flow. As things turned out, Autoliv changed how it got its financing. Out was short-term commercial paper; in was long-term fixed debt. Focus was placed on permanent cost-saving projects that would increase long-term profitability. The share repurchase plan was mothballed alongside the dividend, and the company quickly paid down excess debt.
If you knew where to look, you saw reinstatement of the dividend coming. See, Autoliv is so focused on cash management (a practice that has served it well in all but the most extreme environments) that it has a set of self-imposed financial covenants that it publishes and updates in every quarterly report. During the credit crisis, the business drop-off scuttled these metrics -- and so Autoliv halted its payout. As soon as business picked up enough that these metrics went back into the black, the dividend was reupped.
But that's not all. Since it reinstated the dividend, Autoliv has raised its payout four times in four successive quarters. The current quarterly payout of $0.45 is a record for the company. Even with that record, the shares are still at a reasonably low payout ratio, and have the opportunity for continued dividend hikes. Compare today to pre-crisis:
|
Pre-Credit Crisis (Q2 2008) |
Most Recent Quarter (Q1 2011) |
|
|---|---|---|
| Net Debt |
$1,209 |
$142 |
| Last 12 Months Operating Cash Flow |
$703 |
$917 |
| Last 12 Months of Share Repurchases |
$392 |
$0 |
| Internal Metric: Interest Coverage Ratio (Target: >2.75x) |
10.1x |
14.8x |
| Internal Metric: Leverage Ratio (Target: < 3.0x) |
1.4x |
0.1x |
Source: Capital IQ, company reports.
$ in millions.
At the present level, Autoliv's dividend claims just 17% of (trailing) operating cash flow, on par with the pre-credit crisis level. However, pre-crisis, Autoliv had greater leverage and was also committing significant resources to share repurchases, which the company hasn't made lately. I expect we'll see at least one more dividend hike in the next year.
Risks
I see little risk in Autoliv's dividend policy. I think it would take another credit crisis or sharp drop in auto sales to again trigger the internal covenants that would lead to a dividend curtailment.
A dark-horse risk might be a sudden and significant rise in the U.S. dollar versus the rest of the world. Autoliv pays expenses largely in greenbacks, but generates the majority of its sales overseas.
In sum
Autoliv is a company making a ton of cash with a demonstrated history and willingness to deploy that cash in the service of shareholders. Short of game-changing acquisitions, and barring the restart of a share repurchase plan, there's really little other opportunity for its ample money hoard than continued and growing dividends. Consider riding along.
