Updated on January 31st, 2019 by Bob Ciura
The Dividend Aristocrats are among the highest-quality dividend growth stocks an investor can buy. The Dividend Aristocrats have increased their dividends for 25+ consecutive years.
An even smaller group of stocks have raised their dividends for 50+ years in a row. These are known as the Dividend Kings. Genuine Parts (GPC) has increased its dividend for 62 years straight. You can see all 22 Dividend Kings here.
There is nothing overly exciting about Genuine Parts’ business model, but its steady dividend growth proves that boring can be just what income investors need.
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 6 employees.
Today, Genuine Parts has the world’s largest global auto parts network, with over 6,700 NAPA stores in North America and over 2,000 stores in Europe. Genuine Parts generated over $18 billion of revenue in 2018.
Genuine Parts 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 houses the NAPA brand.
The industrial parts group sells industrial replacement parts to MRO (maintenance, repair, and operations) and OEM (original equipment manufacturer) customers. Customers are derived from a wide range of 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 products dealers, office supply stores, college bookstores, office furniture dealers, and more.
Genuine Parts also distributes electrical and electronic materials to original equipment manufacturers and industrial assembly firms.
Genuine Parts reported third-quarter earnings on 10/18/18 and showed another strong performance. Revenue increased 15% for the quarter, driven by acquisitions. Comparable sales, which measures sales at retail stores open at least one year, rose 4.3% from the same quarter a year ago.
The core Automotive business continued to lead the way with 23% growth. Adjusted earnings-per-share increased 29% thanks to revenue growth, margin expansion, and share repurchases.
Genuine Parts is primed for success, as the environment for auto replacement parts is highly positive. Consumers are holding onto their cars longer and are increasingly making minor repairs to keep cars on the road for longer, rather than buying new cars. As average costs of vehicle repair increase as a 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.
Genuine Parts’ primary strategy to generate growth has historically been acquisitions. It frequently acquires smaller companies, in the U.S. and in the 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.
Source: Investor Presentation
For example, Genuine Parts acquired of Alliance Automotive Group for $2 billion. Alliance is a European distributor of vehicle parts, tools, and workshop equipment. This was an attractive acquisition, as Alliance Automotive holds a top 3 market share position in Europe’s largest automotive aftermarkets: the U.K., France, and Germany. The deal added $1.7 billion of annual revenue to Genuine Parts, along with additional earnings growth potential from cost synergies.
The results of Genuine Parts’ growth strategy speak for themselves. The company has generated record sales and earnings-per-share in seven out of the last 10 years.
Source: Investor Presentation
Acquisitions will continue to fuel growth in the years ahead. Last year, Genuine Parts acquired Hennig Fahrzeugteile, a Germany-based supplier of light and commercial vehicle parts. The acquisition expanded Genuine Parts’ reach in Europe, and also gave it further exposure to the commercial market. Genuine Parts expects the acquired company will boost its annual sales by $190 million.
The company has consistently generated growth over the long term. Future earnings growth is still attainable, through organic growth, acquisitions, and share repurchases.
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 in part 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 of its operating segments represent the #1 or #2 brand in its 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. There will always be a certain level of demand for automotive parts, which gives Genuine Parts’ earnings a high floor.
Valuation & Expected Returns
Based on expected 2018 earnings-per-share of $5.70, Genuine Parts has a price-to-earnings ratio of 17.5. Our fair value estimate for Genuine Parts is a price-to-earnings ratio of 17.0. As a result, Genuine Parts is slightly overvalued at the present time.
A breakdown of Genuine Parts’ historical valuation multiples can be seen in the following table:
A declining valuation multiple would negatively impact future returns to the tune of 0.6% per year over the next five years. Fortunately, Genuine Parts’ future earnings growth and dividends will more than offset a slightly overvalued share price.
We expect Genuine Parts to grow its earnings-per-share by 6.1% annually over the next five years. The stock has a 2.9% current yield, which is significantly higher than the average yield of the S&P 500 Index. And, Genuine Parts raises its divided each year, including a 6.7% increase in 2018.
Genuine Parts has a highly sustainable dividend. The company has paid a dividend every year since it went public in 1948. The following video discusses Genuine Parts’ dividend safety in further detail:
Genuine Parts does not get much coverage in the financial media. It is far from the high-flying tech startups that typically receive more attention. However, Genuine Parts is a very appealing stock for investors looking for stable profitability and reliable dividend growth.
The company has a long runway of growth ahead, due to favorable industry dynamics. It should continue to raise its dividend each year, as it has for the past 62 years.
Today is not the best time to buy shares of Genuine Parts, as the stock appears to be slightly overvalued. Still, the stock is expected to generate satisfactory returns of 8%-9% per year, including a solid dividend yield of nearly 3%. This makes Genuine Parts a suitable holding for dividend growth investors.