This is the sixth in a series of articles that will take a look at the dividend Kings, companies that have paid an increasing dividend for 50 or more years. So far this series of articles has produced companies that range from small cap to large cap with varying 5 year dividend growth rates from 1% to 17%. I was surprised to find all kinds of companies in the list Johnson and Johnson (NYSE:JNJ) a large cap company with dividend growth of 7% and some other companies with dividend growth of less than 1%. I really expected all of these companies to be good investments but some of them disappointed me, so on with the study. This article is about Genuine Parts Company (NYSE:GPC) and why it's a dividend growth income investment that has increased its dividend for 59 years making it a dividend King. Genuine Parts Company is a service organization engaged in the distribution of automotive replacement parts, industrial replacement parts, office products and electrical/electronic materials.. Genuine Parts Company is being reviewed using The Good Business Portfolio guidelines. Fundamentals of Genuine Parts Company will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return and Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways and Recent Portfolio Changes.
Good Business Portfolio Guidelines
Genuine Parts Company passes 10 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive, momentum, total return, and growing companies that keeps me ahead of the Dow average.
Genuine Parts Company is a large-cap company with a capitalization of $14.8 billion. The size of Genuine Parts Company steady cash flow of $850 Million from its business allows it to have the staying power to pay its above average dividend and have plenty of cash for stock buybacks and company expansion. In the distribution sector there are 11 other companies with smaller capitalizations from a low of $5 Million to a high of $4 Billion. All of these could be targets for GPC to buy out and grow more in size with bolt on companies.
Genuine Parts Company has a dividend yield of 2.74% which is above average for the market. The dividend has been increased for 59 years and its dividend is very safe. The payout ratio average over the last 5 years is 50% which leaves plenty of cash to grow the business and for stock buybacks. Genuine Parts Company is therefore a good choice for the dividend growth income investor. After paying the above average dividend there is still cash remaining for business expansion.
Genuine Parts Company yearly cash flow is good at $850 Million which leaves enough cash after paying its dividend for business expansion and stock buy backs. For 2016 Genuine Parts Company has bought back 576,000 shares of an authorization of 5.7 Million shares.
I also require my growth rate going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Genuine Parts Company has a CAGR of 7% (from S&P Capital IQ). Looking back five years $10,000 invested five years ago would now be worth $21,700 today (from S&P Capital IQ). This makes Genuine Parts Company a good investment for the dividend growth income investor and total return investor.
For Genuine Parts Company S&P Capital IQ has a three star rating or hold with a one year price target of $95.00. This makes Genuine Parts Company fairly priced at present but with projected business growth of 7% over the next year. In the long term Genuine Parts Company above average dividend and its growing business in the distribution sector is a good choice for the dividend growth income investor.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Genuine Parts Company had much better total return than the Dow baseline in my 41.5 month test period. I chose the 41.5 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the small loss year of 2015 and the slightly positive year of 2016 YTD to see how the company does in good and bad markets. This above total return of 59.01% for Genuine Parts Company compared to the DOW baseline of 36.34% makes it appropriate for the total return and dividend income investor. Genuine Parts Company pretty much followers the DOW market over the test period and has a dividend growth 0f 5.7% over the past 5 years. Year to date total return is 12.35% well ahead of the DOW small gain so far this year. The dividend was recently increased by 7% in February 2016. The dividend is above average at 2.74% and has been increased for 59 years making the company a dividend King.
DOW's 41.5 month total return baseline is 36.34%
41.5 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Genuine Parts Company
Last Quarter's Earnings
For the last quarter Genuine Parts Company reported earnings on April 19, 2016 that beat expected earnings at $1.05 compared to last year at $1.05 and expected at $1.03 without special items. Expected revenue was inline and total revenue decreased by 0.5% year over year to $3.718 Billion. This was a fair report showing the decreased revenues while still making the earnings goal. This leaves enough cash remaining after paying the $0.658 dividend for expansion. Earnings for the next quarter will be released July18, 2016 and are expected to at $1.30/share compared to last year at $1.28/share a slight increase. From the last earnings call management projected yearly earnings at $4.70 -$ 4.90. They also said they have a small headwind of 1.6% due to the strong dollar that should effect the earnings by $0.01/share.
Company Business Overview
Genuine Parts Company is a service organization engaged in the distribution of automotive replacement parts, industrial replacement parts, office products and electrical/electronic materials. The Company's segments include Automotive, Industrial, Office Products Group, Electrical/Electronic Materials and Other. The automotive segment distributes replacement parts for all makes and models of automobiles, trucks and other vehicles. The industrial segment distributes a range of industrial bearings, mechanical and fluid power transmission equipment, including hydraulic and pneumatic products, material handling components and related parts and supplies. The office products segment distributes a range of office products, computer supplies, office furniture, and business electronics. The electrical/electronic materials segment distributes a range of electrical/electronic materials, including insulating and conductive materials for use in electronic and electrical apparatus. The problem with the business is the small drag from the strong dollar and the companies correlation to the slowly increasing economy which in effect directly drives earnings, GPC likes a strong growing economy. From the last earnings call management said they are going to increase their store count from 15 stores to 150 stores in 2016. Genuine Parts Company business is a steady growing company that should be considered for the dividend Growth income investor.
Takeaways and Recent Portfolio Changes
Genuine Parts Company is a good choice for the dividend growth income investor increasing its dividend for 59 years and growing the dividend in the future but is fairly priced right now and waiting for a better entry point is advised. Genuine Parts Company beats total return compared to the Dow average and is a good choice for the total return growth investor at the right entry point of $95/share. The business is growing at 7% CAGR and Genuine Parts Company is a distribution company that does suffer the swings of most other companies with the economy. The Good Business Portfolio guidelines does not have an open slot right now but will certainly consider Genuine Parts Company when an open position occurs because of its dividend income growth prospects. If you don't already have a position in the distribution sector GPC may be worth a position for your dividend growth income segment of your portfolio at a lower price.
Trimmed Johnson & Johnson from 8.5% of the portfolio to 8.2% of the portfolio, must have good portfolio management and not let any one company get much above 8% of the portfolio. I love JNJ, it pays a 2.8% dividend grows at 8-10% a year and is defensive, JNJ should be in all portfolios.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Below are the six top positions in The Good Business Portfolio. Johnson and Johnson is 8.2% of the portfolio, Home Depot (NYSE:HD) is 7.8% of portfolio, Boeing (NYSE:BA) is 8.0% of the Portfolio, Altria Group Inc. (NYSE:MO) is 7.9% of the portfolio, Eaton Vance Enhanced Equity Fund II (NYSE:EOS) is 7.0% of the Portfolio and Walt Disney (NYSE:DIS) is 6.9% of the portfolio, therefore BA and JNJ are now in trim position with Altria Group Inc., Home Depot, Eaton Vance equity Fund II and Walt Disney getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the fourth quarter earnings call. In the first quarter of 2016 deferred costs were $141 Million and deceasing as the year goes on. Deferred costs should start to decrease in the coming quarters and positive cash flow from the 787 program start to happen.
For the total Good Business Portfolio please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.
I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors (NYSE:OHI) and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, HD, CAB, JNJ, DIS, MO, OHI, EOS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.