Published by Bob Ciura on October 24th, 2017
Every year, we review each of the Dividend Aristocrats. The Dividend Aristocrats are a group of 51 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
Next up, is Genuine Parts Company (GPC).
Investors may not immediately recognize Genuine Parts by its name, but it is much more likely investors know its flagship business, NAPA Auto Parts.
NAPA is the largest automotive parts network in North America, and has fueled Genuine Parts’ growth for nearly eight decades.
Along the way, the company has rewarded shareholders with rising dividends. Genuine Parts has increased its dividend for 61 years in a row.
Not only is it a Dividend Aristocrat, it is a Dividend King as well. There are just 22 Dividend Kings, including Genuine Parts. You can see all 22 Dividend Kings here.
There is nothing overly exciting about Genuine Parts, but its steady dividend growth proves that boring can be beautiful.
Business Overview
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 nearly 40,000 employees, and generated sales of more than $15 billion last year.
Genuine Parts is a distributor of automotive replacement parts, industrial replacement parts, office products, and electrical materials.
Source: 2017 Investor Presentation, page 4
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.
The company’s core industries have healthy fundamentals. Genuine Parts classifies two of its strongest categories as the Do-It-Yourself market, and the Do-It-For-Me market, both of which are growing.
Source: 2017 Investor Presentation, page 11
The company is benefiting from a shift in consumer trends, which is that cars are being held onto much longer today.
Rather than buying new cars, owners are increasingly choosing to have minor repairs done, to extend the life of the vehicle.
These fundamental tailwinds should continue to fuel growth moving forward.
Growth Prospects
To generate growth, Genuine Parts frequently acquires smaller companies, in the U.S. and in the international markets.
For example, on September 25th, the company announced the $2 billion acquisition of Alliance Automotive Group, a European distributor of vehicle parts, tools, and workshop equipment.
This is 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.
Source: Acquisition Presentation, page 4
The deal adds $1.7 billion of revenue to the company, along with additional earnings growth potential. The two companies have highly complementary business models, which means there should be opportunities for substantial cost synergies.
This acquisition also brings international diversification to Genuine Parts.
In addition, on October 19th, Genuine Parts announced acquisitions in its industrial and automotive segments, for an undisclosed sum. The acquisitions will add another $125 million in annual revenue.
Genuine Parts’ growth strategy has resulted in increased sales in 84 out of its 89 years in business. The company has also generated record sales and earnings-per-share in 7 out of the last 10 years.
Source: 2017 Investor Presentation, page 7
It is off to a good start in 2017. Total sales increased 5% over the first three quarters. Adjusted earnings-per-share were nearly flat, year over year.
For the full year 2017, sales are expected to rise 4% to 4.5% from last year. Adjusted earnings-per-share are expected in a range of $4.55 to $4.60, which would be flat with 2016.
Earnings growth has stalled in recent periods, due to intense competition in retail right now. Genuine Parts has had to respond with discounts and other incentives, to retain market share.
However, 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 2008 and 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
Genuine Parts has a price-to-earnings ratio of 20. This is a fairly high valuation for a company with a large exposure to retail, as retailers tend to hold lower price-to-earnings ratios.
Genuine Parts held an average price-to-earnings ratio of approximately 16.7, over the past 10 years. It is currently valued at a premium of approximately 20% to its 10-year average.
It could be argued that the stock is fairly valued, if not slightly overvalued. A declining valuation multiple would negatively impact future returns.
Expected returns will also be generated by earnings growth and dividends. A breakdown of future returns is as follows:
2%-3% revenue growth 1%-2% share repurchases 3% dividend yieldIn this scenario, earnings growth would be in a range of 3%-5% per year, through a combination of revenue growth, and share repurchases. This seems attainable for Genuine Parts, since the company grew earnings-per-share by 4% compounded annually, over the past 10 years.
Genuine Parts’ dividend is also attractive, for its yield and growth.
Source: 2017 Investor Presentation, page 49
The stock has a 3% current yield, which is roughly 50% higher than the average S&P 500 yield of 2%. And, Genuine Parts raised its dividend by 3% in 2017.
The company has increased its dividend for 61 years in a row, which demonstrates a clear commitment to shareholders.
Including dividends, Genuine Parts’ total returns would reach 6%-8% per year, plus or minus any changes in the price-to-earnings ratio.
Final Thoughts
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.
With over 60 years of dividend increases under its belt, and a 3% dividend yield, Genuine Parts is good holding for dividend growth.