Dividend Kings In Focus: Genuine Parts Company Update

Updated on September 29th, 2022 by Josh Arnold

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 45 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 66 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 particularly as vehicles age.

While Genuine Parts stock appears slightly overvalued at the present time, shares offer a yield above the market average, and a high likelihood of continued dividend hikes for many years, in addition to a robust growth forecast.

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 the world’s largest global auto parts network, with more than 10,500 locations worldwide. Genuine Parts generates annual revenue of more than $21 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 reported second quarter earnings on July 27th, 2022, with results widely beating expectations on both revenue and profits. Adjusted earnings-per-share were $2.20, which was 17 cents ahead of estimates. Revenue was an impressive 17% higher year-over-year at $5.6 billion. Revenue was $300 million better than expected. Sales growth was attributable to an 11.5% increase in comparable sales, and an 8.8% benefit from acquisitions. These gains were partially offset by a headwind of 3.2% from the strong US dollar.

For the year, management sees 13% sales growth, and we boosted our estimates of earnings-per-share to $7.95 as a result.

Growth Prospects

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. And, as newer vehicles become more and more expensive, that makes it more likely for customers to keep older cars for longer.

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 $250 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 each 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. While we don’t know what acquisitions may be on the horizon, even without them in 2022, comparable sales are driving strong growth.

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 7% annual earnings-per-share growth over the next five years.

Competitive Advantages & Recession Performance

The biggest challenge facing the economy continues to be supply chain issues stemming from the pandemic, but while the economy recovers, Genuine Parts’ results are improving as well. Thus far, Genuine Parts seems not to be heavily impacted by these issues.

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 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 has always been a certain level of demand for automotive parts given their consumable nature, which gives Genuine Parts’ earnings a high floor.

Valuation & Expected Returns

Based on our expected earnings-per-share of $7.95 for 2022, Genuine Parts has a price-to-earnings ratio of 18.7. Our fair value estimate for Genuine Parts is a price-to-earnings ratio of 17.0. As a result, Genuine Parts appears slightly overvalued at the present time. A declining valuation multiple would negatively impact future returns to the tune of 1.9% 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 7% annually over the next five years. The stock has a 2.4% current yield, which is significantly higher than the average yield of the S&P 500 Index. Furthermore, Genuine Parts raises its dividend each year, including a 9.8% increase for 2022. Genuine Parts Company’s dividend growth streak now stands at 66 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.

Based on out outlook for the next half decade, Genuine Parts’ total annual returns would consist of the following:

• 7% earnings growth
• 2.4% dividend yield
• -1.9% multiple reversion

In total, Genuine Parts is expected to offer a total annual return of 7.3% through 2027.

Final Thoughts

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 66 consecutive years.

While we find the stock overvalued, meaning now may not be the ideal time to buy Genuine Parts, we would recommend the stock after a decline in the share price. Still, Genuine Parts has a solid dividend yield of 2.4% and offers annual dividend increases, making it a worthwhile holding for income-focused investors.