Published on August 17th, 2022, by Felix Martinez
There is no exact definition for blue chip stocks. We define it as a stock with at least ten consecutive years of dividend increases. We believe an established track record of annual dividend increases going back at least a decade shows a company’s ability to generate steady growth and raise its dividend, even in a recession.
As a result, we feel that blue chip stocks are among the safest dividend stocks investors can buy.
With all this in mind, we created a list of 350+ blue-chip stocks, which you can download by clicking below:
This article will analyze Genuine Parts (GPC) as part of the 2022 Blue Chip Stocks In Focus series.
Genuine Parts traces its roots back to 1928 when Carlyle Fraser purchased Motor Parts Depot for $40,000. He renamed it Genuine Parts Company. The original Genuine Parts store had annual sales of just $75,000 and only six employees.
Today, Genuine Parts has the world’s largest global auto parts network. Genuine Parts generated $18.9 billion in annual revenue. Genuine Part is a distributor of automotive replacement parts, industrial replacement parts, office products, and electrical materials.
Source: Investor Presentation
It operates four segments, led by automotive parts, which house the NAPA brand.
The industrial parts group sells replacement parts to MRO (maintenance, repair, and operations) and OEM (original equipment manufacturer) customers. Customers are derived from various segments, including food and beverage, metals and mining, oil and gas, and health care.
The office products segment distributes business products in the U.S. and Canada. Customers include office product dealers, office supply stores, college bookstores, and office furniture dealers. Genuine Parts distributes electrical and electronic materials to original equipment manufacturers and industrial assembly firms.
Genuine Parts reported second-quarter earnings on July 27th, 2022, and results were much better than expected on both the top and bottom lines. Adjusted earnings-per-share came to $2.20, $0.17 cents better than expected, while revenue grew 17% to $5.6 billion. That was $300 million better than estimates.
Sales growth reflected an 11.5% increase in comparable sales and an 8.8% benefit from acquisitions. These were partially offset by a 3.2% net unfavorable impact of forex translation.
Management offered guidance of ~13% sales growth for the year, up from ~11% prior guidance. Adjusted earnings-per-share was raised as well, and we boosted our estimate by a dime, accordingly. Free cash flow was reaffirmed at ~$1.3 billion for the entire year.
Source: Investor Presentation
Genuine Parts is primed for success, as the environment for auto replacement parts is highly positive. Consumers are holding onto their cars longer and increasingly making minor repairs to keep cars on the road for longer rather than buying new ones. As average costs of vehicle repair increase as the car ages, this directly benefits Genuine Parts.
According to Genuine Parts, vehicles aged six years or older now represent over ~70% of cars on the road. This bodes very well for Genuine Parts.
In addition, the market for automotive aftermarket products and services is significant. Genuine Parts has a sizable portion of the $200 billion and growing automotive aftermarket business.
One way Genuine Parts has historically captured market share in this space has been through acquisitions. It frequently acquires smaller companies in the U.S. and international markets to boost market share in existing categories or expand in new areas. Genuine Parts has made several acquisitions over the course of its history.
We expect the company will earn $7.95 per share for the year. This will be an increase of 15% compared to 2021.
Source: Investor Presentation
Competitive Advantages & Recession Performance
The biggest challenge facing the retail industry right now is the threat of e-commerce competition. But automotive parts retailers such as NAPA are not exposed to this risk.
Automotive repairs are often complex, challenging tasks. NAPA is a leading brand, thanks partly to its reputation for quality products and service. It is valuable for customers to be able to ask questions to qualified staff, which gives Genuine Parts a competitive advantage.
Genuine Parts has a leadership position across its businesses. All four operating segments represent the #1 or #2 brand in their respective category. This leads to a strong brand and steady demand from customers.
Genuine Parts’ earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share of $2.98
- 2008 earnings-per-share of $2.92 (2.0% decline)
- 2009 earnings-per-share of $2.50 (14% decline)
- 2010 earnings-per-share of $3.00 (20% increase)
Earnings-per-share declined significantly in 2009, which should come as no surprise. Consumers tend to tighten their belts when the economy enters a downturn.
That said, Genuine Parts remained highly profitable throughout the recession and returned to growth in 2010 and beyond. The company remained highly profitable in 2020, despite the economic damage caused by the coronavirus pandemic. There will always be a certain level of demand for automotive parts, which gives Genuine Parts’ earnings a high floor.
The company has a robust balance sheet. The company sports a debt-to-equity ratio of 1.1 and a long-term debt-to-capital ratio of 52.9. Also, the interest coverage ratio is 22.3, which is a commendable ratio, meaning that the company covers the interest on its debt well.
Source: Investor Presentation
Valuation & Expected Returns
Based on the most recent closing price of ~$159 and the midpoint of expected 2022 earnings-per-share of $7.95, Genuine Parts has a price-to-earnings ratio of 19.8. Our fair value estimate for Genuine Parts is a price-to-earnings ratio of 17. As a result, Genuine Parts is overvalued at the present time.
A decrease in valuation multiple would negatively impact future returns by -3% per year over the next five years. Also, Genuine Parts’ future earnings growth and dividends will offset this.
We expect Genuine Parts to grow its earnings-per-share by 7% annually over the next five years. The stock also has a 2.2% current yield, significantly higher than the average yield of the S&P 500 Index. And, Genuine Parts raises its dividend each year, including a recent 10% increase in February.
Genuine Parts has a highly sustainable dividend. The company has paid yearly dividends since it went public in 1948. The dividend is likely to continue growing for many years to come. That said, investors should also consider the impact of valuation on a stock’s total returns.
Genuine Parts’ total annual returns would consist of the following:
- 7% earnings growth
- -3% multiple headwinds
- 2.2% dividend yield
In total, Genuine Parts is expected to offer a total annual return of 6.2% through 2027. This is a low rate of return.
The company has a long runway of growth ahead due to favorable industry dynamics. It should continue to raise its dividend yearly, as it has for the past 66 years.
Given its history of dividend growth, Genuine Parts is suitable for investors desiring income and steady dividend increases each year. Investors looking for growth will likely consider the stock a hold due to its low expected returns.
The Blue Chips list is not the only way to quickly screen for stocks that regularly pay rising dividends.
- The Dividend Aristocrats: S&P 500 stocks with 25+ years of consecutive dividend increases.
- The High Yield Dividend Aristocrats List is comprised of the Dividend Aristocrats with the highest current yields.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 45 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks: Monthly dividend stocks with the highest current yields.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Complete List of Russell 2000 Stocks: arguably the world’s best-known benchmark for small-cap U.S. stocks.
- The Best DRIP Stocks: The top 15 Dividend Aristocrats with no-fee dividend reinvestment plans.
- The 2022 High ROIC Stocks List: The top 10 stocks with high returns on invested capital.
- The 2022 High Beta Stocks List: The 100 stocks in the S&P 500 Index with the highest beta.
- The 2022 Low Beta Stocks List: The 100 stocks in the S&P 500 Index with the lowest beta.