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Dividend Aristocrats In Focus Part 22: Genuine Parts Company (GPC)

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Genuine Parts Company (GPC) started from very humble beginnings. It began in 1928, when Carlyle Fraser purchased Motor Parts Depot for $40,000. He renamed it Genuine Parts Company, and it has held that name ever since.

The original Genuine Parts store had annual sales of $75,000, and only 6 employees. Today, Genuine Parts has more than 39,000 employees and annual sales of more than $15 billion.

Genuine Parts has raised its dividend payments for 60 consecutive years.  This is one of the longest active streaks of any business.  The streak more than qualifies Genuine Parts to be a Dividend Aristocrat…

Dividend Aristocrats are S&P 500 stocks with 25+ consecutive years of dividend increases.  You can see the list of all 50 Dividend Aristocrats here.  Genuine Parts qualifies to be a Dividend Aristocrat more than twice over.  It is in a different league altogether.

In fact, Genuine Parts Company is also a member of the even more exclusive Dividend Kings List – a group of 18 businesses with 50 consecutive years of dividend increases.

Genuine Parts Company has proven it can grow its dividends over a wide variety of economic conditions.  Keep reading this article to learn more about the investment prospects of Genuine Parts Company.

Genuine Parts Company – Business Overview

Genuine Parts is a distributor of automotive replacement parts, industrial replacement parts, office products, and electrical materials. The business is split into these four categories, each of which generates a significant portion of total annual sales:

  • Automotive Parts Group: 52% of total sales
  • Industrial Parts Group: 30% of total sales
  • Office Products Group: 13% of total sales
  • Electrical/Electronic Materials Group: 5% of total sales

The automotive parts group, which represents more than half of Genuine Parts’ total revenue, is comprised of the core NAPA brand.

The industrial parts group sells industrial replacement parts to MRO (maintenance, repair, and operations) and OEM (original equipment manufacturer) customers. These customers are spread across a wide range of industries, including food and beverage, forest products, metals and mining, oil and gas, and pharmaceuticals.

The office products segment distributes more than 62,000 items through 6,300 resellers and distributors in the U.S. and Canada. Customers include office products dealers, office supply superstores and mass merchants, college bookstores, office furniture dealers, and many more.

Lastly, the electrical and electronic materials business distributes more than 100,000 items to more than 20,000 customers. The customer base is made up mostly of original equipment manufacturers and industrial assembly firms.

Growth Prospects

No company can increase its dividend for as long as Genuine Parts has, without supporting earnings-per-share growth. Over the past 10 years, Genuine Parts grew earnings-per-share by 5.3% compounded annually.

Growth was tempered a bit last year. Sales dipped slightly from 2014, but most of the decline was due to currency fluctuations. Foreign exchange had a 3% negative impact on sales. Adjusting for this, to focus on Genuine Parts’ organic results, shows that the company grew revenue by 1.5% and generated record earnings-per-share in 2015.

Going forward, one major growth catalyst for the company will be international growth. Genuine Parts currently generates the vast majority of its sales in the U.S., but it is looking to change this moving ahead.

Source: 2015 Annual Report, page 3

Another compelling growth catalyst for the company is favorable consumer trends. In the U.S., consumers are holding onto their cars for much longer than previous generations did. They are largely choosing to fix minor repairs rather than buy new vehicles.

Genuine Parts Company

Source: 2016 Investor presentation, page 12

The company also plans to generate earnings growth from cost cuts. Over the first half of 2016, sales declined fractionally, but earnings-per-share remained flat. A big reason for this was expense reductions that matched revenue declines.

This earnings-per-share growth will help continue the company’s amazing streak of dividend growth. Genuine Parts has provided investors with solid dividend growth each year, at rates that soundly beat inflation.

Genuine Parts Company

Source: Geniune Parts Dividend History

Competitive Advantages & Recession Performance

The most important competitive advantage for Genuine Parts is its massive distribution network, which consists of over 2,650 operations located throughout the U.S., Canada, Mexico, the Caribbean, Australia, New Zealand, China, and other emerging global markets.

Its distribution network provides the ability to quickly supply retailers and small stores with the parts and supplies they need.  Entering this industry would be highly capital intensive.

The other main competitive advantage for the company is its trusted brand names, particularly NAPA. Customers have come to rely on NAPA for high-quality products and competent advice. Automotive repairs vary on a case-by-case basis, and having highly qualified staff members that can help customers keeps customer retention high.

There are over 6,000 NAPA stores in the U.S., which keeps Genuine Parts brand placement at a high level among consumers.

These competitive advantages are a big reason why Genuine Parts’ sales increased in 63 of the last 66 years.

The company’s earnings-per-share declined from 2007-2009, but Genuine Parts remained highly profitable. And, earnings-per-share quickly recovered to reach a new high by 2010:

  • 2007 earnings-per-share of $2.98 (new high)
  • 2008 earnings-per-share of $2.92 (2.0% off high)
  • 2009 earnings-per-share of $2.50 (16.1% off high)
  • 2010 earnings-per-share of $3.00 (new high)

This is a testament to Genuine Parts’ business model, which is highly recession-resistant. Even though the company is reliant on a healthy consumer, it is also true that there is always a need for automotive replacement parts.

And, there could be an argument that aftermarket products see higher demand during a recession. When the economy enters recession, cash-strapped consumers are typically more inclined to make auto repairs themselves rather than go to higher-priced mechanics.

Valuation & Expected Total Returns

Genuine Parts stock trades for a price-to-earnings ratio of 19.4, which is below the S&P 500 price-to-earnings ratio of 24.5. Its price-to-earnings ratio is right on par with its average multiple since 2000, which is 19.5.

As a result, Genuine Parts stock appears fairly valued, or perhaps slightly undervalued. In a difficult environment for retailers, the stock may not generate enough earnings growth to allow for multiple expansion of the price-to-earnings ratio.

Therefore, investors will earn future returns from earnings-per-share growth and dividends. Earnings-per-share are likely to grow from the following sources:

  • 3%-5% core revenue growth
  • 1%-2% revenue growth from acquisitions
  • 1% share repurchases

Consequently, earnings-per-share growth could be reasonably expected to reach 5%-8% per year. In addition to the stock’s 2.9% dividend yield, total return potential could exceed 10% annualized, assuming no contraction of the price-to-earnings ratio.

Final Thoughts

Genuine Parts has increased its dividend for six consecutive decades. It has a current dividend yield that is significantly higher than the average dividend yield of the S&P 500.

The company has a slightly above average rank using The 8 Rules of Dividend Investing.  It is a long term hold for investors looking for exposure to the automotive industry.

Article by Bob Ciura

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