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Johnson Controls Inc (JCI), Delphi Automotive PLC (DLPH): An Auto Recovery Is Good for These Auto Parts Suppliers

Johnson Controls Inc (NYSE:JCI)The overall macro picture for the U.S. economy has been improving. Employment is rising and consumers are spending again. One area in particular where they are spending is the auto sector. Many consumers held off from purchasing during the financial crisis and have now started trading in their old cars for new ones. The Big 3 auto companies have seen sales pick up and their fortunes turnaround. For me, I always like to dig in and see who benefits besides the obvious names. In this rebound, the group to focus on is the auto parts suppliers.

The auto parts supply giant

Johnson Controls Inc (NYSE:JCI) is a global auto parts supplier operating in more than 150 countries with over 168,000 employees. The company makes lead-acid batteries and advanced batteries for hybrid and electric vehicles. The biggest imprint that Johnson Control has on the automotive sector, though, is in car interiors. The company provides all aspects of a car interior including overhead systems, floor consoles, door systems, instrument panels and seating configurations. Besides the automotive sector, Johnson Controls Inc (NYSE:JCI) also provides heating and cooling systems for buildings.

Johnson Controls Inc (NYSE:JCI) has been investing in its various businesses the last few years to make them more efficient. Last year the company spent $1.8 billion in capital expenditures and this is on top of the $1.3 billion spent in 2011. The result should be increased margins and cash flow.

Looking forward, Johnson Controls Inc (NYSE:JCI) trades at a forward P/E of 11.54. Analysts are optimistic that the company’s investments and turnaround initiatives will pay off in the form of earnings. Forecasts for this year average $2.61 per share according to Zacks. Last year, Johnson Controls earned $1.35 per share.

Perhaps the most enticing aspect to owning Johnson Controls Inc (NYSE:JCI) is its steady dividend. The company has been steadily increasing its dividend for decades, except in 2009 during the financial crisis. The dividend increases resumed in 2010 and the dividend is now $0.76 per share for a yield of 2.1%. The dividend payout ratio is 53%, and I see the company continuing to increase the dividend as earnings rise.

A reborn company

Delphi Automotive PLC (NYSE:DLPH) has had a colorful history and was deeply affected during the financial crisis and filed for bankruptcy protection. Delphi Automotive PLC (NYSE:DLPH) produces auto components and has over 118,000 employees worldwide. The company’s main focus is on the North American and Chinese markets, where the company sees the most potential. Europe remains weak for Delphi Automotive PLC (NYSE:DLPH) just like every other automotive-related company.

In the first quarter, Delphi Automotive PLC (NYSE:DLPH) repurchased $122 million in stock and initiated an annual dividend of $0.68 per share for a yield of 1.20%. The company has $525 million left on its authorized share repurchase program, and the dividend payout ratio is only 5%. Look for the dividend to increase and for the company to continue buying its stock.

Going forward, Delphi Automotive PLC (NYSE:DLPH) expects operating cash flow to average roughly 75% to 80% of EBITDA. The company plans to use 35% to 40% for capital expenditures, 10% to 15% to fund the dividend, and the balance will be for share repurchases and possible acquisitions. This is a great use of cash and Delphi Automotive PLC (NYSE:DLPH)’s management does a great job at capital allocation. Evidence of this is the fact that the company has reduced the share count from 686 million in 2010 to 314.5 million in the first quarter through share buybacks, the majority of which occurred between $21 and $35 per share.

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