Updated on October 19th, 2021 by Bob Ciura
In order for a company to become a Dividend King, it must have a long track record of generating steady dividend growth, even during recessions. This is far from an easy task, which makes it all the more impressive for a company to reach the status of a Dividend King.
It should be no surprise that we consider the Dividend Kings to be among the highest-quality dividend stocks in the entire stock market.
Wit this in mind, we created a full list of all 32 Dividend Kings, along with important financial metrics such as dividend yields, payout ratios, and price-to-earnings ratios. You can download the full list by clicking on the link below:
Genuine Parts Company (GPC) has increased its dividend for over 60 consecutive years, giving it one of the longest streaks of annual dividend raises in the entire stock market. It has achieved this growth with a top brand in an industry that has seen consistent growth over many years. There remains a clear path ahead for continued growth.
While Genuine Parts stock appears overvalued at the present time, shares offer a yield above the market average, and a high likelihood of continued dividend hikes for many years.
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 more than 10,500 locations worldwide. Genuine Parts generates annual revenue of nearly $18 billion as a major distributor of automotive and industrial parts.
Source: Investor Presentation
It operates two segments, which are automotive (includes the NAPA brand) and the industrial parts group which 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.
Genuine Parts posted second quarter results on July 22nd, 2021, and results were better than expected on both the top and bottom lines. Sales were $4.8 billion, up 25% year–over–year. The gain was due to a 20% increase in comparable sales, a 1.5% gain from acquisitions, and a 4% gain from favorable currency translation.
The company said its sales growth was due to a continually strengthening global economy and positive sales environment in both Automotive and Industrial. Automotive sales posted double–digit growth in all regions, and Industrial segment sales grew for the fourth consecutive quarter.
Genuine Parts posted its 15th consecutive quarter of gross margin expansion, resulting from stronger sales and ongoing expense initiatives. Net income was $253 million on an adjusted basis, an increase of 33% from the $191 million from a year ago. On a per–share basis, adjusted net income was $1.74 against $1.32 in the same quarter a year ago.
Genuine Parts is primed for success, as the environment for auto replacement parts is highly supportive of growth. 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 the majority of cars on the road. This bodes very well for Genuine Parts. In addition, the total addressable market for automotive aftermarket products and services and industry products is very large, and fragmented, which leaves plenty of opportunity for expansion.
Source: Investor Presentation
Genuine Parts has a sizable portion of the $200 billion and growing automotive aftermarket business. One specific 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.
Source: Investor Presentation
These acquisitions have helped lead to earnings growth in eight out of the last 10 years. 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 several acquisitions that should add to the company’s leadership position in several different markets. In 2019, Genuine Parts completed its acquisition of PartsPoint. Based in the Netherlands, PartsPoint is a leading distributor of automotive aftermarket parts and accessories.
The company completed its purchase of leading industrial distributor Inenco in 2019. Inenco has operations in Australia, New Zealand and Indonesia. Later that month, Genuine Parts announced it was adding Todd Group, a leader in the heavy-duty aftermarket segment in France.
Overall, it is clear that Genuine Parts’ multiple acquisitions have helped the company generate long-term growth.
The results of Genuine Parts’ growth strategy speak for themselves. The company’s sales and profits have increased in 87 and 76 years out of its 96-year history, respectively.
Genuine Parts divested its S.P. Richards US operations and it’s Safety Zone and Impact Products operations, as it continues to optimize its portfolio to focus on its core automotive and industrial parts businesses. We expect Genuine Parts to generate 6% annual earnings-per-share growth over the next five years.
Competitive Advantages & Recession Performance
The biggest challenge facing the economy continues to be the coronavirus pandemic, but as the economy recovers from the pandemic conditions, Genuine Parts’ results are improving as well.
The other threat to physical retailers is 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 also generated cash flow during the coronavirus pandemic, which allowed it to raise its dividend in 2020.
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 our expected earnings-per-share of $6.30 for 2021, Genuine Parts has a price-to-earnings ratio of 20.3. Our fair value estimate for Genuine Parts is a price-to-earnings ratio of 17.0. As a result, Genuine Parts appears overvalued at the present time. A declining valuation multiple would negatively impact future returns to the tune of 3.5% per year over the next five years. Fortunately, Genuine Parts’ total returns will also include earnings growth and dividends.
We expect Genuine Parts to grow its earnings-per-share by 6% annually over the next five years. The stock has a 2.5% 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 3.2% increase for 2021. Genuine Parts Company’s dividend growth streak now stands at 65 consecutive years.
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:
- 6% earnings growth
- 2.5% dividend yield
- -3.5% multiple reversion
In total, Genuine Parts is expected to offer a total annual return of 5% through 2026.
Genuine Parts has a long history of steady growth, as it has benefited from rising demand for automotive parts. The aging vehicle fleet in the U.S. should provide continued growth moving forward. In the meantime, shareholders should receive annual dividend increases as has been the case for over 60 consecutive years.
While we find the stock overvalued, meaning now is not the right time to buy Genuine Parts, we would recommend the stock after a meaningful decline in the share price. Still, Genuine Parts has a solid dividend yield above 2.5% and offers annual dividend increases, making it a worthwhile holding for income-focused investors.