CAR Group Limited: Navigating Challenges with Resilient Dividends and Growth Potential

In an era where profitability and shareholder returns are under constant scrutiny, CAR Group Limited (ASX:CAR) faces a critical juncture. While its Return on Equity (ROE) has dipped to historic lows, the company's robust dividend history and strategic focus on earnings growth suggest opportunities for patient investors. This analysis dissects CAR Group's financial health through three lenses—ROE, earnings momentum, and dividend sustainability—to determine whether its stock presents a compelling buy today.

ROE: A Temporary Dip or Structural Issue?

CAR Group's trailing twelve-month (TTM) ROE of 8.61% as of May 2025 marks a sharp decline from its 10-year average of 32.65%. This drop is alarming, but context matters. The ROE plunge coincides with strategic shifts, including the exit of its Tyres business and repositioning toward online marketplaces. While the ROE is now below the industry average of 19.1%, management has signaled a focus on cost optimization and portfolio streamlining.

Critically, the ROE decline isn't uniform across divisions. The company's core automotive and non-automotive marketplaces continue to deliver stable margins, even as one-time restructuring costs and sector-specific headwinds (e.g., supply chain disruptions) weigh on profitability. If management can execute its restructuring plans, a rebound toward historical averages is plausible.

Earnings Growth: A Steady Climb Amid Volatility

Despite the ROE slump, CAR Group has maintained 24% net income growth over five years, outperforming the industry average of 18%. This resilience stems from its dominant position in Australian online marketplaces and disciplined expansion into regions like South Korea and Latin America.

Key drivers include:
- Marketplace scalability: Its platforms (e.g., Carsales, Jevic) benefit from low incremental costs as traffic grows.
- Geographic diversification: Revenue streams now span 12 countries, reducing reliance on any single market.
- Cost discipline: Even as ROE dipped, operating margins remain healthy at 22.35%, reflecting efficient resource allocation.

While short-term volatility persists, the long-term growth trajectory is intact.

Dividend Sustainability: A Pillar of Investor Confidence

CAR Group's dividend policy has been a standout feature for over a decade. With a consistent payout for 10+ years and a high payout ratio of 88% over three years, shareholders have been prioritized even during challenging periods.

2025 Outlook:
- Dividend yield: A 2.13% yield (TTM) offers steady income in a low-rate environment.
- Payout safety: Despite the payout ratio exceeding earnings in recent quarters, the company's strong cash reserves (A$70.5M as of March 2025) and free cash flow generation provide a buffer.
- Future guidance: Analysts project the payout ratio to stabilize at 83%, while ROE is expected to recover to 16% by 2026.

This combination of income and growth potential makes CAR Group's dividend a rare “have your cake and eat it too” opportunity.

Risks and Considerations

• ROE recovery timeline: Delays in restructuring could prolong low returns.
• Competitive pressures: New entrants in digital marketplaces (e.g., Amazon, regional startups) threaten margins.
• Geopolitical risks: Trade policies and supply chain disruptions remain wildcard factors.

Investment Thesis: Buy with a Long-Term Lens

CAR Group is undeniably at a crossroads, but its fundamentals—dividend consistency, marketplace dominance, and geographic diversification—position it for a rebound. While ROE is a concern, the company's actions (e.g., portfolio pruning, cost cuts) suggest a path to recovery.

Actionable Insight:
- Entry point: With the stock trading at a 12-month forward P/E of 18.2x (below its five-year average of 22x), now is an opportune time to build a position.
- Hold horizon: 2–3 years to allow restructuring benefits to materialize and ROE to stabilize.

Final Verdict

CAR Group Limited isn't without risks, but its dividend resilience and growth tailwinds make it a compelling play for income-focused investors willing to endure short-term turbulence. With a payout ratio anchored to cash flow and a management team focused on strategic pruning, CAR.AX could emerge stronger in the next economic cycle. Invest now for dividends today and growth tomorrow.

Data as of May 23, 2025. Past performance does not guarantee future results.