Genuine Parts: Consistently Slow Dividend Growth

| About: Genuine Parts (GPC)

A reader has requested that we have a look at Genuine Parts Company (NYSE:GPC). Is this worthy of joining our portfolio of superior dividend yielding stocks? Let’s find out.

Company Profile:

From Yahoo Finance

Genuine Parts Company and its subsidiaries distribute automotive and industrial replacement parts, office products, and electrical/electronic materials in the United States, Canada, and Mexico. It operates in four segments: Automotive, Industrial, Office Products, and Electrical/Electronic Materials. The Automotive segment distributes approximately 320,000 replacement parts other than body parts for imported vehicles, trucks, SUVs, buses, motorcycles, and recreational and farm vehicles. It also retails auto parts under the NAPA brand. The Industrial segment offers various 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 provides computer supplies, imaging products, office furniture and machines, general office products, school supplies, cleaning and breakroom supplies, and healthcare products. The Electrical/Electronic Materials segment distributes magnet wire, conductive materials, insulating and shielding materials, assembly tools, test equipment, adhesives and chemicals, pressure sensitive tapes, solder, antistatic products, and thermal management products to original equipment manufacturers.

Market capitalization is $8.50B.

Company Fundamentals:

Return on invested capital has been very steady over the last 10 years. Management has delivered an ROIC in the 12% - 13% range consistently. The 5 year ROIC comes out to 13.5%.

Return on equity has also been very consistent in the 15% to 17% range. The 10 year average ROE is 16.74% while the 5 year average ROE has declined ever so slightly to 16.49%.

Equity growth rate has also been consistent - but consistently low. The 9 year rate is 3.84%. The 5 year rate stays consistent at 3.85%. The 3 year rate was 4.32% and unfortunately, last year’s rate came in at -3.96%. Very consistent except for last year.

Earnings per share growth rate has been trending upwards. That is always a good sign (although the equity growth rate has been quite consistent!). The 9 year rate is 3.13%. The 5 year rate increases to 6%. The 3 year climbs to 10.82% and last year’s EPS growth rate remained there at 10.4%. Interesting divergence from the equity growth rate.

Sales growth rates have been very consistent but with a slight upswing in recent years. The 9 year rate is 5.24%. The 5 year rate holds steady at 5.23%. The 3 year rate jumps to 7.39% but comes down slightly last year to 6.9%.

Fundamentals seem consistent. But the growth rates are nothing to write home about.

Dividend Fundamentals:

This stock has a decent dividend yield of 2.92%. I consider that on the high side as compared to the dividend yields of the S&P 500 Index and the DJIA.

Now, one of our key metrics, the dividend growth rate has been rather disappointing. The 9 year dividend growth rate is 3.44%. The 5 year rate stays consistent at a mere 3.15%. The 3 year rate has a slight uptick to 4.55%. And last year’s dividend growth rate was uncharacteristically high at 8%. Definitely not the kind of growth rate I want to see. I prefer to see a double digit growth rate closer to 15% if possible.

The dividend payout ratio has remained consistently right in the 50% range over the 10 year period.

Cash flow growth rates have been promising as they have been increasing significantly. The 9 year rate is a mere 2.59%. The 5 year rate jumps to 4.77%. The 3 year rate doubles up to 9.97% and last year’s rate confirms this new growth rate with 10.84%.

Valuation Models:

Let’s determine a fair price for this stock.

From an average high dividend yield perspective, this stock is expensive. Although the current 2.92% dividend yield seems above average, it is in fact quite low for this particular stock. The 10 year average high dividend yield is a whopping 4.12%. The 5 year average high dividend yield is 3.76%. If we demand this 5 year average high dividend yield, then the model price works out to $38.83. At the current price of $50.00, Mr. Market is demanding a premium of 28.77%!

Benjamin Graham would also agree that this price is too high. The Graham number works out to $31.13 which implies a premium of 60.63%. Even our new ‘modified’ Graham number (which accounts for a 5% current interest rate) only comes out to $35.94.

For my discounted present value method, I used the following inputs:

  • future EPS growth rate of 3.84% (This was determined by looking at the historical equity growth rate. It is much more conservative than the 10% forecasted by the analysts.)
  • future P/E of 7.68 (This P/E is low due to the low future EPS growth rate assigned. Why would an investor be willing to have a P/E in the 16-17 range if the future expected growth rate is a mere 3.84%?)
  • dividend yield of 3.76% (the 5 year average high dividend yield)
  • future dividend growth rate of 3.15% (the 5 year dividend growth rate)

Obviously, with the low future EPS growth rate and the low P/E, this stock is going to come out grossly overpriced. The model price works out to $11.70. This always happens with these very low growth rate companies.

Here is my dividend analysis of GPC.

Here is the 1 year stock price chart:

Stock Price Chart for GPC

This stock has been performing very well over the last year.

Conclusion:

The company fundamentals are consistent - but consistently low. The dividend growth rate is also way too low for my liking. All the valuation methods also show that this stock is way ahead of itself.

Personally, I would not add this company to my portfolio of superior dividend yielding stocks.

Full Disclosure: I do not own shares in GPC.