Dividend King Genuine Parts Co. Presents a Genuine Opportunity as It Trades at a Discount

Rarely do investors get the opportunity to purchase the highest-quality dividend stocks, such as the Dividend Kings, at a discount. But the market's recent selloff on coronavirus fears has presented multiple buying opportunities when it comes to the best dividend growers. Genuine Parts Co. has declined by nearly 20% year to date, but this is simply a buying opportunity for long-term investors. Genuine Parts remains a leader in a growing industry and it will benefit from a major trend taking place in the auto parts market. Genuine Parts also has increased its dividend for more than 60 years in a row, placing it on the exclusive list of Dividend Kings. And, Genuine Parts stock now offers a 3.7% dividend yield thanks to the recent dip in the stock price. It is also undervalued in my view, making Genuine Parts a buy for dividend growth investors. Business Overview and Recent Events Genuine Parts was founded in 1928 and since that time it has grown into a sprawling conglomerate that sells automotive and industrial parts, electrical materials and general business products. The company's flagship brand is NAPA auto parts. Its global span reaches throughout North America, Australia, New Zealand and Europe and is comprised of more than 3,100 locations. It has a market capitalization of $12.5 billion, with nearly $20 billion in annual revenue. Genuine Parts reported fourth-quarter and full-year earnings on Feb. 19 and results were better than expected on the top and bottom lines. Sales for 2019 came to $19.4 billion, up 3.5% from 2018's level of $18.7 billion. The full-year period represented the third consecutive year of record sales for the company as Genuine Parts continues to try to optimize its broad portfolio with acquisitions and divestitures. Net income was $833 million on an adjusted basis. Adjusted earnings-per-share came to $5.69, essentially flat with 2018's level of $5.68. This year is likely to be another year of steady growth. Genuine Parts guided for full-year 2020 sales of flat to up 1%, or up 3% to 4% on an adjusted basis, which excludes the impact of certain divestitures. Earnings-per-share guidance is for $5.80 to $5.90 for the full year. Genuine Parts is taking steps to streamline its business model by divesting business segments that are not deemed critical to its long-term prospects. For example, Genuine Parts announced the divestiture of its S.P. Richards Canada subsidiary to Novexco, Inc., the proceeds of which it plans to use within its overall capital allocation strategy, which includes dividends and buybacks. This is the latest move in the company's effort to optimize its portfolio by exiting the Canadian business products segment and focusing on its core auto parts business. Vehicle Fleet Trends Drive Long-Term Growth Genuine Parts is likely to see continued growth for many years in its core auto parts business thanks to a big trend taking place in the United States. Consumers are keeping their cars on the road for much longer rather than buying new cars more frequently. This is a potential gold mine for Genuine Parts as older cars require more frequent repairs and these repairs become more expensive as a vehicle ages. According to Genuine Parts, the average repair cost per year of vehicles that are one to five years old is $555. But this average repair cost increases to $829 annually for vehicles six to 12 years old and declines somewhat to an average annual cost of $797 for vehicles older than 12 years. As a result, the prime years for aftermarket repairs start at year six. Fortunately for Genuine Parts, vehicles six years and older now represent more than 70% of the total U.S. vehicle fleet. This trend presents a very favorable backdrop for Genuine Parts' core auto parts business and the company has a long and proven track record of successfully taking advantage of growth opportunities. Sales and profits at Genuine Parts have increased in 87 years and 75 years, respectively, of its 92-year history. The company also has generated record sales in eight of the past 10 years and record earnings per share in nine of the past 10 years. Over the past decade Genuine Parts has grown its sales and earnings per share by compound annual rates of 7% and 9%, respectively. Attractive Value and Dividend Stock Growth from the tailwinds in the auto parts industry will allow Genuine Parts to continue increasing its dividend for many years. The company has increased its dividend for 64 years, giving it one of the longest track records of annual dividend increases among any company in the United States. Not only is it a strong dividend growth stock, it has an attractive current yield of 3.7% thanks to the recent dip in share price to start 2020. Plus, the weak share price action to begin the year has lowered the stock valuation as well. Based on expected 2020 earnings per share of $5.85, representing the midpoint of management guidance, Genuine Parts stock trades for a forward price-to-earnings (P/E) ratio of 14.9x, which is as an attractive valuation for a highly profitable company operating in a growing industry. The combination of earnings-per-share growth, an expanding P/E multiple and the solid dividend yield could result in annual returns of more than 10% per year over the next five years for Genuine Parts. This is a favorable expected rate of return, which makes the stock a buy for dividend growth investors looking for reasonably valued stocks.

This Dividend King Presents a Genuine Opportunity as It Trades at a Discount

Genuine Parts, parent of the NAPA auto parts chain, is down amid the market selloff, which makes it a bargain for dividend growth investors.

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