TipRanks Smart Dividend Newsletter – Edition #11
Hello and welcome to the 11th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
Today’s dividend stock recommendation is one of the largest and most diversified auto and industrial parts suppliers in the world, which has been raising its dividends consistently for the past 67 years. The company’s stock is now trading at a considerable discount to its peers, presenting a great entry point for investors.
But first, let’s delve into a short update on our view of the markets, supporting our investment case.
Investment Thesis: Moving Parts
In these unpredictable times, we strive to find companies that have proven their ability to prosper and pass on this prosperity to their shareholders through the years and various economic scenarios.
One of the industries where we can find these champions is replacement automotive parts retailers. Financially strong auto-parts distributors demonstrate resilience in the face of varying economic conditions such as inflation, disinflation, fluctuating interest rates, and alternating periods of economic boom and bust. Their unique positioning in the marketplace provides a degree of immunity against these economic shifts, and their financial strength reinforces this resistance.
During periods of inflation, the prices of goods and services rise. However, auto-parts distributors can often pass these cost increases on to the consumers, especially if their product offerings are unique or high in demand. Moreover, if the distributors are financially strong, they are likely to have ample liquidity and cash reserves to absorb higher costs without significantly denting their profitability. Conversely, in times of disinflation, these businesses can benefit from lower costs while maintaining their prices. This scenario can result in increased margins and profitability.
High interest rates can pose a challenge to many businesses due to increased borrowing costs. However, financially solid auto parts distributors typically have robust cash flows, reducing their dependence on external financing. Additionally, their stable revenues can help service any existing debts even during high-interest rate periods. When interest rates are low, these companies can leverage the situation to refinance existing debts or invest in expansion initiatives, fueling growth. The persistent demand for their products ensures that these investments can yield profitable returns even in a low-interest-rate environment.
In a thriving economy, auto parts distributors often witness increased sales due to higher consumer spending. Conversely, in a downturn, while new car sales might dwindle, the demand for replacement parts can increase as consumers choose to maintain their existing vehicles rather than invest in new ones. Regardless of economic circumstances, vehicles break down and need repairs. This constant need makes the sector relatively resistant to economic downturns, providing a reliable revenue stream. Stable and reliable revenues support consistent and growing dividend payments.
Quality Dividend Stock: This Week’s Top Pick
Genuine Parts Company (GPC) is a diversified retailer of replacement automotive parts, industrial parts, and materials. It operates through the Automotive Parts Group and the Industrial Parts Group segments.
The Automotive Parts Group sells replacement parts, accessories, and service items for all kinds of vehicles, from electric cars and motorcycles to farm and heavy-duty equipment. The company also distributes accessory and supply items used by various automotive aftermarket customers, such as repair shops, service stations, fleet operators, automobile and truck dealers, leasing companies, bus and truck lines, mass merchandisers, farms, and individuals. This segment distributes its products throughout the U.S., Canada, Mexico, Australasia, France, the U.K., Ireland, Germany, Poland, the Netherlands, Belgium, Spain, and Portugal. In North America, the products are sold primarily under the NAPA Auto Parts brand name, which the company is now rolling out in Europe as well, in addition to a variety of banners already recognized in different countries on the continent. In Asia-Pacific, the company serves its customers primarily under the Repco and NAPA brand names.
The Industrial Parts Group is represented by Motion Industries in North America and Mi Asia Pacific in Australasia. The Industrial Parts Group distributes industrial replacement parts and related supplies, such as bearings, mechanical and electrical power transmission products, industrial automation and robotics, hoses, hydraulic and pneumatic components, industrial and safety supplies, and material handling products for original equipment manufacturers, as well as maintenance, repair, and operation customers from all industries. The company’s NAPA Auto Parts, Alliance Auto, and Motion Industries brands are among the most well-known and trusted automotive/industrial replacement parts retailers on the planet.
Genuine Parts Company was incorporated in 1928 in Atlanta, Georgia, as a single auto parts store. Since then, the company has grown organically and through acquisitions, becoming the largest automotive aftermarket network in the U.S. and a global service organization with 58,000 employees and over 10,000 operations in 17 countries across North America, Europe, and Australasia. With its market capitalization of $22 billion, GPC is a large-cap company in the Consumer Discretionary sector (Industry: Distributors). Genuine Parts is a Fortune 500 company.
GPC’s international expansion began in 1972 with an acquisition of a Canadian auto parts distributor. Genuine Parts started its diversification outside of automotive parts in 1976 with the acquisition of Motion Industries. Through the years, GPC acquired 21 companies in the auto- and industrial-part segments of its market, expanding its business and steadily growing its market share. In 2022, GPC acquired Kaman Distribution Group for approximately $1.3 billion in cash, and AutoAccessoriesGarage.com, an e-commerce automotive accessories platform, for an undisclosed amount.
While GPC may belong to the discretionary goods sector, its products are actually a necessity, especially in the U.S. and Australia, where more than 90% of households own at least one vehicle, but also in Europe, where the average car ownership rate is on the rise. With still-high inflation rates and higher-than-average gas prices, coupled with surging financing costs due to rising interest rates, buying a new vehicle is an expensive endeavor for most people. According to IHS Markit research, the average vehicle age in these three regions was 12.1 years in 2021 and is expected to reach 12.6 years by 2025. Meanwhile, keeping their used vehicles in good condition is a high priority for owners, regardless of the economic environment; thus, GPC’s products are meeting high and rising demand.
Additionally, the acceleration of growth in the electric vehicle (EV) market provides another strong growth driver for parts makers and sellers. As per McKinsey’s report, trends in autonomous driving, connected vehicles, and electrification, will contribute to a 7% CAGR in automotive electrical and electronic components, outpacing the overall growth in the automotive market. According to the Persistence Market Research report, the global market for automotive aftermarket parts is expected to grow at a CAGR of 5.5% from 2023 to 2033, reaching almost $1 trillion. Asia-Pacific is the leading region in terms of growth rates, followed by North America and Europe.
Thanks to the essentiality of its products and the associated steady revenue stream, Genuine Parts Company has been increasing its dividends for 67 consecutive years. As a result, the company qualifies for inclusion in the most lucrative dividend club, the Dividend Kings – companies that have been growing their dividends for more than 50 years. Genuine Parts has delivered a 7% dividend growth per year on average over the past 10 years. The latest dividend increase was in March 2023, when the payout rose by 6.7%; in March last year, it grew by 10%.
The company’s dividend yield stands at 2.4%, versus the sector’s average of 2.2% and the industry’s average of just 1.3%. With its reasonably low payout ratio of 33.3%, GPC’s dividend payments are well-covered by earnings, while the company retains enough profit to invest in growth opportunities and reduce debt. With steadily rising earnings and a low payout, GPC is expected to continue raising its dividends for years to come.
In addition to dividends, Genuine Parts rewards its shareholders with generous stock buybacks. In 2022 the company purchased its shares for the amount of $223 million; in the first half of 2023, GPC allocated $135 million for buybacks, used to repurchase 841,000 shares. The company’s management conveyed confidence in its ability to effectively deploy capital through all business cycles, thus confirming GPC’s commitment to rewarding its shareholders through dividends and stock repurchases.
Genuine Parts’ financial health is robust. Although its debt-to-equity ratio of 83% is considered quite high, it has been steadily declining despite the numerous acquisitions performed in recent years. Besides, GPC’s debt is well-covered by operating cash flow, while interest payments are covered by EBIT many times over. GPC’s short-term assets exceed both its short- and long-term liabilities.
As for the capital efficiency and profitability metrics, GPC boasts an outstanding Return on Equity (ROE) of 31.5%, versus the industry’s average of 7%, and a high Return on Assets (ROA) of 7.2%, almost twice the industry’s average. Genuine Parts’ net profit margin of 5.3% is considerably higher than the average (2.2%) for its industry.
In the second quarter of 2023, the company surpassed analysts’ EPS projections, as it did in all quarters in the past years, with a single exception in Q1 2020, at the high of the Covid-19 crisis. Since Q4 2020, the company has reported double-digit earnings-per-share growth in every quarter. The company’s strong cash-generating abilities reemerged, as GPC finished the quarter with $530 million in cash and cash equivalents. The company generated a free cash flow of $252 million for the six months ended Jun 30, 2023. Building on another solid quarterly result, which included record sales numbers, the company’s management has revised upward its full-year 2023 guidance, penciling in higher annual EPS than previously forecasted. Genuine Parts’ revenues have been growing at an average annual rate of 5.5% in the past five years, while earnings increased at a rate of 16%.
Genuine Parts Company’s stock has brought its long-term shareholders a profit of 78% in the past three years, versus the S&P 500 (SPX) 46% increase. In the past 12 months, though, the stock’s performance has been volatile, moved by an uncertain economic outlook, apart from the company- and sector-specific news. Thus, GPC underperformed the index in the past year, rising by 8.2% versus the SPX’s 14.4%. The underperformance was largely driven by this year’s 8% decline in Genuine Parts’ stock, while the S&P 500 rallied strongly. However, this year’s underperformance streak has led to a decline in the company’s valuation, supplying a much more attractive entry point than before the drop, as GPC’s TTM P/E of 18.3 and Forward P/E of 17.0 are less than half of what they were at their peak. General Parts’ valuation is similar to that of the Consumer Discretionary sector, though that sector includes some notoriously expensive companies (such as Amazon and Tesla). GPC is now also trading considerably cheaper than most of its peers in the industry.
No wonder this value-priced Dividend King has been drawing increasing attention from hedge funds as well as individual investors, with both groups loading up on the stock in recent months. Analysts forecast an average 12-month upside of 13.5% for GPC’s stock, which is rated 9/10 (“Outperform”) by TipRanks’ Smart Score system, with a “Moderate Buy” analyst recommendation:
In conclusion, we believe that Genuine Parts Company will continue to benefit from long-term growth in demand, while its sustained aggressive acquisition strategy, combined with its prudent management and solid capital allocation approach, will continue benefiting its shareholders. With its solid financial performance and almost seven-decade history of dividend growth, GPC’s investors can rest assured that they will most likely see their payout raised in the years to come. Moreover, the decrease in valuation way below historical averages provides an attractive entry opportunity. To sum it all up, we view Genuine Parts Company as an alluring income investment.
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