Genuine Parts Is the Genuine Article When It Comes to Dividend Growth

Of all the companies to invest in, there are just 31 that have increased dividends for at least 50 years. Known as the Dividend Kings, this exclusive group has raised its dividends through all portions of the economic cycle, including times of expansion and recession, many times over. The Dividend Kings all have several characteristics in common, namely excellent business models, catalyst for growth and competitive advantages that set them apart from their industry peers. Genuine Parts Co. is a quality Dividend King with a long history of steady growth. The distributor of automotive replacement parts continues to generate growth, benefiting from a shift in consumer behavior toward keeping cars longer. As a result, GPC is an attractive stock for long-term dividend growth. Business Overview Since its founding in 1928, Genuine Parts has transformed into the world's largest automotive parts network. The company also sells industrial parts, electrical materials and general business products. Genuine Parts has operations in North America, Europe, Australia and New Zealand. The company produced revenue of $17 billion last year and sports a market capitalization of nearly $19 billion. Genuine Parts reported its first-quarter earnings on April 22. Revenue decreased 2.1% to $4.46 billion, though this was the best year-over-year results in the past five quarters. Adjusting for divestitures, revenue actually improved 9.1%. COVID-19 was a significant headwind to results over the last year as consumers drove less due to work at home and social distancing restrictions and therefore needed fewer replacement parts for their vehicles. Adjusted earnings per share of $1.50 were a 63% improvement from the prior year. Genuine Parts topped estimates for both revenue and earnings. The company has steadily grown its top and bottom lines over the last decade. Revenue compounded at a rate of nearly 3% from 2011 through 2020, with earnings per share growing at a 3.9% clip over this same period. The COVID-19 pandemic did hurt the above growth rates. For the period of 2010 through 2019, revenue grew at an average rate of 5.6% annually while adjusted earnings per share improved 6.6% per year on average. We believe 2020 is an outlier due to the unprecedented impact from the COVID-19 pandemic on the world's economy. Going forward, Genuine Parts is much more likely to see growth closer to the prior period's rates. Growth Prospects and Competitive Advantages Genuine Parts has experienced steady growth over the years due to its industry leadership. With more than 3,000 stores, the company is firmly entrenched as a leading distributor of automotive repair products, far exceeding the vast majority of its peers. One big factor working in the company's favor is the sheer size of the automotive and industrial markets, which are estimated at $230 billion and $200 billion, respectively. Despite the vast size of its network, Genuine Parts' total market share of the automotive market is 8% and just 3% of the industrial market. In terms of individual markets, Genuine Parts' automotive business accounts for 20% market share in Australasia and 14% market share in Canada. The company's market share is in the single digits in every other market, including the U.S., which is Genuine Parts' largest and most important region, and Mexico. U.S. market share in just 7% while Mexico is just 1%, although it is projected to see higher growth rates than all other regions. Penetration in the industrial global market is just 3%. The automotive aftermarket business continues to grow, in large part due to the age of cars on the road. About two-thirds of cars in the U.S. have been on the road for at least six years, which happens to be the age when vehicle repairs tend to become more expensive. The cost of upkeep continues to grow the longer a vehicle remains in service. Genuine Parts, due to its reach, is in a prime position to benefit from consumers' desire to maintain their vehicles. The company's business works extremely well in a recession because consumers eschew new car purchases in favor of repairing their existing vehicles. All this means Genuine Parts still has plenty of runway for growth with just its core businesses. The company is also augmenting its core business with acquisitions, something it does quite often. Genuine Parts tends to make acquisitions that will give it an entrance or larger footprint in areas where it has a smaller presence. Examples of this include the company's 2018 addition of Germany-based Hennig Fahrzeugteile, which supplies parts for light-duty and commercial vehicles, its 2019 purchase of Netherlands-based PartsPoint, which provides automotive aftermarket parts and accessories, and the 2020 acquisition of Inenco, which operates in Australia, Indonesia and New Zealand. Dividend Analysis Overall, Genuine Parts' business model has allowed for long-term growth. In the company's 93-year history, it has experienced revenue growth in 87 years and profit growth in 76 years. Most other companies, not just in the industry but in the marketplace, can't compete with this track record. The combination of market share, business model, catalyst for growth and competitive advantages have made possible the distribution of an ever-growing dividend. With a 3.2% dividend increase for the April 1 payment date, Genuine Parts' dividend growth streak extended to 65 years. There are just two other companies with a longer dividend growth streak in the entire marketplace. The company's dividend has a compound annual growth rate (CAGR) of 6% since 2011. Genuine Parts' dividend has been raised through eight separate recessions, an incredible feat considering the pain these contractions caused for so many companies. The company's earnings per share fell nearly 16% from 2007 to 2009 as the Great Recession did impact its results. That said, the company rebounded the very next year to deliver a new high for earnings per share, showing that Genuine Parts is very resilient. Genuine Parts also continued to raise its dividend, with shareholders receiving a 9.6% total increase over this same period. With an annualized dividend of $3.26 and our expectations for earnings per share of $6.05 in 2021, Genuine Parts has a projected payout ratio of just 54%. For comparison purposes, the company's average payout ratio over the last decade is 52%. Shares offer a yield of 2.5%, which is below the average yield of 3% since 2011 but still considerably higher than the 1.4% average yield for companies in the S&P 500 Index. Final Thoughts Genuine Parts has benefited from an excellent business model and its leadership position in its industry. There remains plenty of room for growth due to the total addressable market for both automotive and industrial. These factors, plus a reasonable payout ratio, should provide for many more years of dividend growth on top of the nearly unmatched streak that the company currently enjoys. For these reasons, we believe investors looking for safe and reliable income should consider owning Genuine Parts.

Genuine Parts Is the Genuine Article When It Comes to Dividend Growth

The distributor of automotive replacement parts has a nearly unmatched record of raising dividends through good times and bad.

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