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Entering post-Stronach era, Magna opens its coffers

Don Walker, CEO of Magna International Inc. addresses shareholders during the 2013 annual general meeting of the company in Toronto, May 10, 2013.

Fernando Morales/The Globe and Mail

The days of Magna International Inc. hoarding cash are coming to an end in another demonstration that the auto parts giant is putting the Frank Stronach era behind it.

"We're generating a fair amount of cash and we've got cash on the balance sheet," chief executive officer Don Walker told reporters Friday after the company's annual meeting. "We recognize we need to be putting that cash to work."

The company would like to be cash neutral, chief financial officer Vince Galifi added.

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Magna built up its cash pile over more than two decades after Mr. Stronach essentially banned debt after a debt-fuelled expansion binge brought the company to the edge of a financial abyss in the late 1980s and early 1990s.

It endured continued calls from institutional shareholders and analysts to pay higher dividends, buy back shares or make some other effective use of the cash during those years, but Mr. Stronach, founder and until 2010 Magna chairman, insisted the cash hoard remain intact. The cash pile grew to $2.8-billion before the recession hit in 2008.

The strong balance sheet created by the cash pile provided a key pillar that enabled the company to weather the 2008-09 auto crisis and bankruptcy protection filings in 2009 by two of its largest customers, Chrysler LLC and General Motors Corp. It also put the company in a position to make the winning bid for GM's European Adam Opel division, although GM later cancelled the sale of Opel.

Mr. Stronach stepped down as chairman in 2011 after a controversial buyout of his multiple-voting shares in 2010. Since then, Magna has steadily increased its dividend, bought back shares, restructured its board of directors and taken other shareholder-friendly actions.

The cash will be put to work on capital spending for growth opportunities, acquisitions and more dividend increases and share repurchases, Mr. Walker and Mr. Galifi told the company's annual meeting Friday.

If acquisitions don't meet Magna's requirements to add technology or new customers "we're going to make sure we're not just hoarding cash, because we realize there's not a good return [having it] sitting on our balance sheet," Mr. Walker said after the meeting.

Companies that balance the need to invest in the business while returning a portion of the excess cash to shareholders are a preferred investment, said an investment manager who holds Magna shares, but whose company does not permit him to speak publicly.

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Magna's gross cash dwindled by $275-million to $1.25-billion in the first quarter. But increases of 8 per cent in profit and earnings per share and a 9-per-cent jump in revenue pleased investors. Profit rose to $369-million from $343-million, generating share profit of $1.57 versus $1.46 a year earlier. Revenue rose to $8.36-billion from $7.67-billion.

A brighter outlook for 2013 sales than the company issued in February and an improvement in some troubled European operations also helped send the company's shares up 3.56 per cent to $65.46 in trading on the TSX.

Although auto makers reduced vehicle production in Europe from year-earlier levels, Magna's adjusted earnings before interest and taxes rose to $72-million (U.S.) from $63-million a year earlier.

The company held its dividend to 32 cents a share per quarter, but the intention is to increase it over time, Mr. Galifi said.

He added that Magna will buy back another 10 million shares under a normal course issuer bid that expires in November, which will return about $600-million to shareholders.

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About the Author
Auto and Steel Industry Reporter

Greg Keenan has covered the automotive and steel industries for The Globe and Mail since 1995. He also writes about broader manufacturing trends. He is a graduate of the University of Toronto and of the University of Western Ontario School of Journalism. More

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