Genuine Parts: An Above Average and Growing Dividend for These Uncertain Times

Aug.13.10 | About: Genuine Parts (GPC)

Steady Eddie

Genuine Parts Company (NYSE:GPC) headquartered in Atlanta, Georgia and founded in 1928, has long been a paragon of consistent operating results. They have paid a cash dividend every year since going public in 1948, and 2010 marks their 54th consecutive year of increasing their dividend. Genuine Parts’ current yield of 3.8% is more than 100 basis points higher than the current yield on a 10-year treasury bond.

Genuine Parts Company, although not historically a fast grower, has long been considered an extremely high-quality company with consistent and reliable cash flow generation. Value Line ranks them A+ for financial strength and Zacks rates them as low risk.

However, thanks to various initiatives to boost sales and earnings, recent growth has been significantly above historical norms. On July 16, 2010, General Parts Company reported sales growth of 12% to $2.85 billion, and earnings per share growth of 20%. This was on top of an above-average first quarter report.

Figure 1A below looks at Genuine Parts Company through the lens of our EDMP F.A.S.T. Graphs since 1997. As Figure 1 depicts, earnings growth, although not exceptionally fast, has been reasonably steady (the orange line with white triangles - earnings justified and value line).

The light blue shaded area graphs the payout of dividends from the green shaded earnings area, and is stacked on top for visual perspective. The black price line shows that stock prices tracked earnings closely, and when prices deviated away from earnings they quickly returned to earnings.

(Click charts to enlarge)

Figure 1A GPC 15yr. EPS Growth Correlated to Price

Figure 1A GPC 15yr. EPS Growth Correlated to PriceClick to enlarge

Figure 1B below calculates the performance of Genuine Parts Company associated with Figure 1A. The two most important takeaways from the Dividend Cash Flow table are the steady, albeit not exceptionally fast, growth of the dividend and the consistency of Genuine Parts’ payout ratio.

Figure 1B GPC Historical Performance

Figure 1B GPC Historical PerformanceClick to enlarge

For perspective, Figures 2A and 2B look at the S&P 500 over the same time frame. Figure 2A below shows that although the average company (as measured by the S&P 500) grew earnings faster than Genuine Parts (5.7% for the S&P 500 versus 3.7% for General Parts Company), the S&P 500’s growth was much more cyclical and therefore, less predictable.

Figure 2A S&P 500 15yr. EPS Growth Correlated to Price

Figure 2A S&P 500 15yr. EPS Growth Correlated to Price

Figure 2B shows that the dividend growth of the S&P 500 was also unpredictable with dividends cut in calendar years 2000, 2001 and 2009. Consequently, total dividends based on an original $100,000 investment totaled $38,290.11, or less than the $53,335.97 generated by Genuine Parts Company’s (GPC) more consistent growth (see Figure 1B).

Figure 2B S&P 500 Historical Performance

Figure 2B S&P 500 Historical PerformanceClick to enlarge

Thesis for growth

Genuine Parts has taken numerous steps to diversify their business and to position the company for future growth. These include strategic acquisitions, new product developments, additional market penetrations, and strategic management changes and realignments. Additionally, cost-cutting efforts are paying off as recent earnings reports indicate. Genuine Parts Company operates under four business segments as follows:

1. NAPA (National Automotive Parts Association): Distributes automotive and industrial placement parts, office products and electrical/electronic materials. NAPA is by far their largest segment generating over 50% of sales. This important segment’s operations were up 7% in the second quarter of 2010, which followed 6% improvements for both the first quarter of 2010 and the fourth quarter of 2009.

2. Motion Industries: Their Industrial Parts Group which distributes bearings, motor controls, hydraulics, industrial hoses and supplies, etc. This is the second-largest segment which generates just under 30% of sales. This important segment achieved sales growth of 26% in the second quarter of 2010. Organic growth was 18% with the remainder attributed to the acquisition of BC Bearing.

3. S.P. Richards Company: Their Office Products Group Distributor which distributes office furniture, computer supplies, general office supplies, school supplies, presentation products, business equipment, janitorial products, warehouse and safety items, and break room supplies. The Office Products Group generates 16% of sales. This important segment is still feeling the effects of the recession, as business was down 1%, but seems to be firming up.

4. EIS: Is their Electrical/Electronic Materials business that distributes products and process materials, production supplies and industrial motor repair products to the major markets it serves. Products include varnishes and resins, electrical tapes, soldering material, and adhesives and sealants, etc. EIS is their smallest segment generating approximately 3% of sales. Although the smallest segment, EIS was also the fastest growing with business up 32% in the second quarter of 2010.

Figure 3 below calculates Genuine Parts’ future earnings and dividend growth based on the consensus of 13 analysts reporting to FirstCall. Note that this estimated 10.2% earnings growth forecast is significantly greater than historical norms. However, this estimate is in line with recently reported quarterly results.

Figure 3 GPC Consensus Earnings Estimate

Figure 3 GPC Consensus Earnings EstimateClick to enlarge

Figure 4 below calculates potential earnings and dividends assuming those analysts estimates in Figure 3 are correct. In fact, if they do manifest, then Genuine Parts Company shareholders would be well rewarded based on dividend yield alone.

Figure 4 GPC Earnings Yield Estimates through 2016

Figure 4 GPC Earnings Yield Estimates through 2016Click to enlarge

Conclusion

In our opinion, with Genuine Parts Company currently trading at under 16 times earnings with a dividend year greater than 3.8% and the potential to grow makes this company an attractive candidate for investors seeking yield and quality. The company generates strong cash flows that should allow them to reward shareholders with a growing dividend as they have for the past 54 consecutive years.

Value Line Investment Survey rates Genuine Parts Company number 1 (highest) for safety, and is giving Genuine Parts Company high marks for price stability and earnings predictability. This blue-chip stalwart has a very strong balance sheet with debt representing less than 16% of their capital structure and a management that takes great pride in the company’s historical dividend achievements. Therefore, we feel it should be given careful consideration by prospective investors looking for predictability during these uncertain times.

Disclosure: Long GPC at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.