Updated on March 9th, 2021 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.
Becoming a Dividend Aristocrat is no small feat. Beyond certain market capitalization and trading volume requirements, Dividend Aristocrats must have raised their dividends each year for at least 25 years, and be included in the S&P 500 Index.
This presents a high hurdle that relatively few companies can clear. For example, there are currently 65 Dividend Aristocrats out of the 500 companies that comprise the S&P 500 Index.
We created a complete list of all 65 Dividend Aristocrats, along with important financial metrics like dividend yields and price-to-earnings ratios. You can download an Excel spreadsheet of all 65 Dividend Aristocrats by clicking the link below:
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 65 consecutive years, giving it one of the longest dividend growth streaks in the market. You can see all 31 Dividend Kings here.
There is nothing overly exciting about Genuine Parts’ business model, but its steady annual dividend increases prove that a “boring” business can be just what income investors need for long-term dividend growth.
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. Genuine Parts generated $16.5 billion in annual revenue. 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 fourth quarter and full-year earnings on February 17th, 2021. Revenue was $4.3 billion in Q4, down fractionally from the same period a year ago. The decline was due primarily to a -2.8% decline in comparable sales, which was partially offset by a 0.8% tailwind from acquisitions, as well as a 1.3% gain from foreign exchange translation.
Net income from continuing operations came to $221 million on an adjusted basis, up from $186 million in the same period of 2019. On a per-share basis, earnings were $1.52, up 20% from $1.27 in the year-ago period.
For the year, sales were $16.5 billion, down -5.6% year-over-year. Excluding divestitures, sales were down -2.3% year-over-year. Adjusted earnings were $5.27 per share, down from $5.31 per share in 2019. We expect $5.70 in earnings-per-share for this year following guidance from management.
2020 was a difficult year for Genuine Parts, as the coronavirus pandemic dragged the U.S. economy into recession. Still, Genuine Parts remained highly profitable last year, which allowed it to continue raising its dividend. And, the meaningful improvement seen in the fourth quarter of the year bodes well for a return to growth in 2021.
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.
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 captured market share in this space 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.
For example, Genuine Parts acquired 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.
In 2018, Genuine Parts agreed to acquire 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.
More recently, Genuine Parts has made additional acquisitions such as the 2010 acquisition of PartsPoint. Based in the Netherlands, PartsPoint is a leading distributor of automotive aftermarkets parts and accessories. The company separately completed its purchase of leading industrial distributor Inenco to further boost its international presence. Inenco has operations in Australia, New Zealand and Indonesia. Finally, Genuine Parts announced it was adding Todd Group, a leader in the heavy-duty aftermarket segment in France.
These deals completed over the past few years have added significantly to Genuine Parts’ annual sales and profits. The company has consistently generated growth over the long term. Future earnings growth is still attainable, through organic growth, acquisitions, and share repurchases. We expect 5% annual EPS growth over the next five years for Genuine Parts.
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. 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.
Valuation & Expected Returns
Based on the most recent closing price of ~$113 and the midpoint of expected 2021 earnings-per-share ($5.70), Genuine Parts has a price-to-earnings ratio of 19.9. 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 declining valuation multiple would negatively impact future returns by -3.1% per year over the next five years. Fortunately, Genuine Parts’ future earnings growth and dividends will more than offset an overvalued share price.
We expect Genuine Parts to grow its earnings-per-share by 5% annually over the next five years. The stock also 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 dividend each year, including a recent 3.2% increase in February.
Genuine Parts has a highly sustainable dividend. The company has paid a dividend every year 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 when it comes to a stock’s total returns.
Genuine Parts’ total annual returns would consist of the following:
- 5% earnings growth
- -3.1% multiple reversion
- 2.9% dividend yield
In total, Genuine Parts is expected to offer a total annual return of 4.8% through 2026. This is a satisfactory, if unspectacular, rate of return.
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 65 years.
Today, however, is likely not the best time to buy shares of Genuine Parts, as the stock appears to be slightly overvalued. Given its history of dividend growth, Genuine Parts is suitable for investors desiring income, as well as steady dividend increases each year. Investors looking for more growth will likely consider the stock a hold due to mid-single digit expected returns.