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Is AP Eagers Ltd a better buy than Australia and New Zealand Banking Group?

Credit: niconico0

According to reports in the Fairfax Press on Thursday, AP Eagers Ltd (ASX: APE) is on the verge of achieving something Australia’s third largest bank, Australia and New Zealand Banking Group (ASX: ANZ) could not do – eight consecutive years of record dividend payments.

ANZ Bank paid a record dividend each year in the seven years following the Global Financial Crisis (GFC), until its first half of this year where the bank opted to cut its dividend amidst a group restructure. At the same time, AP Eagers’ dividend payment feats appear to have gone unnoticed with the group lifting its dividend amount each year.

With management already indicating a strong start to the first four months of trading in 2016, placing the group “again in record territory”, it is likely that AP Eagers will do what ANZ Bank could not and pay an eighth consecutive record dividend.

This begs the question, should you buy AP Eagers?

About AP Eagers

AP Eagers is an automotive conglomerate, owning and operating motor vehicle dealerships predominantly along the east coast of Australia. According to its website, the group owns a diversified portfolio of automotive brands including all 12 of the top selling car brands in Australia. It achieves this through acquisition of dealership clusters, growing the business steadily over time.

Impressively, the group also owns 65% of the land on which all of its car dealerships are located – mostly in prime positions throughout Brisbane, Sydney, Melbourne and Adelaide. This provides the group with over $278 million in prime real estate, further diversifying operations during a time where property assets are growing.

Company valuation

Acquisitive business models like AP Eagers’ can spell trouble when executed poorly, just look at the ill-fated Slater & Gordon Limited (ASX: SGH) for proof. Nevertheless, when executed with patience and precision, acquisitions can provide strong returns and boost company operations.

AP Eagers appears to be in the latter group, with profits growing at a record rate every single year. Whilst results have been buoyed by strong motor vehicle sales in the past few years (a product of low interest rates and better affordability), the group continues to take market share from competitors demonstrating proactive management. This culture augurs well for the company if sales eventually slow.

Nonetheless, the market appears to be attuned to AP Eagers’ success. A high price earnings makes it rather expensive in my mind, making me look for alternatives.

Foolish takeaways

Investors often need to look beyond banks to find industries which are growing at rapid paces. The car industry appears to be one of them. Although AP Eagers commands high multiples, it’s solid business model and track record seems to justify its current price.

Whilst I will wait for a pullback in price before buying, ancillary car industry companies such as Automotive Holdings Group Ltd (ASX: AHG) (which AP Eagers holds a stake in itself) and Burson Group Ltd (ASX: BAP) are on my radar to play this thematic.

If you are interested in quality dividend shares, then I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia owns shares of Burson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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