2 Dividend Aristocrats For Your Portfolio

| About: Genuine Parts (GPC)
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Summary

Dividend Aristocrats outperformed the S&P 500 as a group.

Reinvesting dividends adds to the compounding effect.

Genuine Parts Company and W.W. Grainger sell parts and supplies that help the world work.

Companies that boost dividends consistently significantly add to their investment potential, especially when you reinvestment them. The S&P 500 Dividend Aristocrat list is comprised of companies that have raised their dividends for the last 25 years. The list provides investors with a myriad of potentially lucrative investment ideas. Companies on that list gave investors a 10.7% return vs. 7.9% for the S&P 500 over the past 10 years. However, it's important to evaluate the business behind the company to see if it can continue to pay and boost dividends. Let's check out the two dividend aristocrats listed below.

The cogs in the wheels of civilization

Most of Genuine Parts Company's (NYSE: GPC) business comes from the sale of automotive parts under the well-known names of NAPA and Balkamp. Also, to a lesser extent, the company sells industrial parts and products under the name of Motion Industries. An expanding economy helped this company grow its top and bottom lines. Genuine Parts Company saw its revenue, net income, and free cash flow increase a conservative 40%, 71%, and 33% respectively over the past five years (see chart below).

GPC Revenue (Annual) Chart

GPC Revenue (Annual) data by YCharts

Genuine Parts Company possesses an okay balance sheet. Its $136 million in cash only equates to 4% of stockholders' equity. I prefer to see companies with cash amounting to 20% or more of stockholders' equity to help self-finance expansion and for rainy days. However, the company's long-term debt to equity ratio only equates to 14% of stockholders' equity, way below my personal threshold of 50%. This means that profit choking interest will be held to a minimum.

It's also important that a dividend aristocrat pays out a prudent amount of its free cash flow in dividends so it can save a portion for reinvestment back into the business. My personal preference is that a company pays out less than 50% of its free cash flow in dividends. In the table below you can see that Genuine Parts Company fell under that personal threshold every year except 2011.

Genuine Parts Company

Year

2009

2010

2011

2012

2013

Dividend to Free Cash Flow Ratio

36.1%

43.5%

53.0%

37.4%

34.9%

Source: Morningstar and author's calculations

Reinvesting dividends definitely adds up over time. Genuine Parts Company shareholders saw the price of their shares go up 179% over the past five years (see chart below). Reinvesting dividends, those dividends would have added another 47% with the total return during that time going to 226% vs. the S&P 500 total return of 108%.

GPC Chart

GPC data by YCharts

Genuine Parts Company raised its dividends for 58 consecutive years. Genuine Parts Company currently pays it shareholders $2.30 per share per year translating into a juicy yield of 2.3% annually.

Maintenance pays

W.W. Grainger (NYSE: GWW) sells a wide variety of maintenance, repair, and operating supplies such as paint, tools, cleaning supplies and parts. This represents products that are needed and less prone to obsolescence. Like Genuine Parts Company, W.W. Grainger grew its revenue, net income, and free cash flow at a conservative rate expanding 52%, 85%, and 21%, respectively, over the past five years (see chart below).

GWW Revenue (Annual) Chart

GWW Revenue (Annual) data by YCharts

W.W. Grainger also possesses a decent balance sheet with its $320 million in cash equating to 9% of stockholder's equity, below my personal threshold of 20%. However, W.W. Grainger's long-term debt only equates to 11% of stockholders' equity.

W.W. Grainger also kept its dividend at a sustainable over the past five years with payments below 50% of free cash flow (see table below). W.W. Grainger has raised its dividend 43 consecutive years. Currently, the company pays its shareholders $4.32 per share per year and yields 1.8% annually.

W. W. Grainger

Year

2009

2010

2011

2012

2013

Dividend to Free Cash Flow

22.9%

31.9%

33.0%

38.9%

35.7%

Source: Morningstar and SEC calculations

Company shareholders saw their stock price increase 167% over the past five years (see chart below). Reinvesting those dividends would have added another 22% bringing its total return to 189% vs. 109% for the total return of the S&P 500 as a whole.

GWW Chart

GWW data by YCharts

Looking ahead

These companies sell the things that make civilization go, which means the products they sell aren't going away anytime soon. The stock market also realizes the potential of these companies with Genuine Parts Company and W.W. Grainger trading at P/E ratios of 23 and 22 respectively making them somewhat overvalued compared to the S&P 500 ratio of 19. Investors may want to take small positions in these companies while adding more during corrections.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.