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Big, Shiny Cars, Trunks Full of Dividends

When I think of luxury automobiles, the first brand that comes to mind is Mercedes-Benz.

I’m sure it has something to do with the era I grew up in (I’m a Gen-X’er). But Mercedes always seemed to be the symbol of material success, even when the cars weren’t very good. Mercedes-Benz was able to maintain its aura despite many turbulent years, especially during the Daimler-Chrysler era.

That in itself is amazing. You see, Daimler (PINK: DDAIF) produced a lot of crappy vehicles but still managed to sell them, mainly because of the cachet associated with the name. But since Daimler-Chrysler split up, things have changed for the better.

Not only has the Mercedes-Benz brand survived, but Daimler’s now producing higher quality vehicles, selling more of them and getting rave reviews. The stock’s undervalued by some estimates – significantly so, too – and it pays a healthy dividend.

Before hitting the dividend details, though, let’s crunch a few fundamentals…

Kicking the Tires

It’s true that the company reported mixed second-quarter results. Revenue was up 9% from the previous year, for a total of 25.6 billion euros. On the other hand, earnings per share (before special items) were down 9% compared with 2011, at 1.38 euros.

Still, the company managed to beat analysts’ estimates by 0.10 euro per share.

Going forward, problems in the European economy will hinder sales on a regional basis in the short term. But some analysts (including me) think that the stock has been beaten down excessively. In the most optimistic case, the prediction is for the stock to appreciate by more than 75% from here – potentially to more than $90 per share.

As for the dividend, the stock paid an annual $1.62 in April, representing a yield of 4.23%. That’s twice the S&P 500’s average yield.

Despite having suspended the dividend in 2009 (shortly after it separated from Chrysler in the midst of the financial crisis), the company quickly renewed its program, paying shareholders in both 2010 and 2011. What’s more, it’s increased the dividend by almost 30% since.

In the end, I feel confident in the future of Daimler’s dividend, especially considering the company’s leading position in the North American premium car and heavy-duty truck markets. While the automobile industry regains its footing, the dividend serves to offset any decline in sales.

Abroad, Mercedes continues to be the premier luxury brand around the globe. In the BRIC countries (Brazil, Russia, India and China), unit growth for 2010 ranged between 40% and 140%. Daimler is well-positioned to take advantage of emerging market growth, especially when taking into account the widespread cultural preference for Mercedes-Benz in those regions.

Historically, Daimler suffered a lot of volatility in the post-Chrysler era, as seen on the chart below.

The top-line analyst prediction of $90-plus per share would set the stock back to pre-financial crisis levels.

Assuming that no external factors worsen, Daimler continues focusing on quality and it continues to grow sales in both the United States and emerging markets – I’m convinced we’ll see the stock move higher. At the very least, it should head to the top of the 52-week range ($65).

In fact, it’s headed there already. Since bottoming in June, Daimler has been rising nicely, narrowing the range and setting up the next leg higher.

Bottom line: I think the positive fundamentals, a soon to be improved global economic situation and the resilient high-end car business make Daimler a compelling investment. It’s been a consistent dividend payer (sans 2009) and is better-poised today to maintain a strong dividend program than it has been in a long time.

Safe investing,

Steve Gunn