TipRanks Smart Dividend Newsletter – Edition #42
Hello and welcome to the 42nd 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.
Investment Thesis: Spare Profits
Companies working within the automotive and industrial parts distribution sector keep our cars running and our industry churning. Their business model offers investors a unique blend of stability and growth potential. With an emphasis on long-term value creation, firms in this industry are distinguished by their ability to generate substantial cash flows, enabling robust dividend payouts and compelling investment opportunities.
Let us present one such company, which is a compelling income investment idea.
This Week’s Quality Income Stock Idea
Genuine Parts Company (GPC) is a leading global service organization engaged in the distribution of automotive replacement parts and industrial parts and materials. GPC has been in business for over 90 years, and during this time it has established a strong brand name, diverse product portfolio, global presence, extensive distribution network, and strong partnerships with suppliers, manufacturers, and customers.
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Company Overview
Founded in 1928, Genuine Parts Co. is ranked #179 in the Fortune 500 list of the largest U.S. companies. It commands a market capitalization of $21.05 billion and annual revenues of $23.1 billion. Headquartered in Atlanta, Georgia, GPC serves its clients through a network of over 10,700 locations spanning 17 countries, which are supported by more than 60,000 employees.
The company operates through two main segments: Automotive Parts Group and Industrial Parts Group. The Automotive Parts Group, responsible for 62% of total GPC annual sales, sells auto parts under several brand names, with the most recognizable of them being NAPA, UAN, Hennig, Knoll, Voigt, and Repco. Through its global automotive network, the Automotive Parts Group serves both the Commercial (80%) and Retail/DIY (20%) automotive aftermarket segments, with products and services for substantially all domestic and foreign motor vehicle models.
The Industrial Parts Group, responsible for 38% of total GPC annual sales, provides access to ~20 million industrial replacement parts and supplies for more than 200,000 MRO (maintenance, repair, and operations) and OEM (original equipment manufacturer) customers in all types of end markets, including equipment and machinery, food and beverage, iron and steel, pulp and paper, mining and automotive, among others. Its major products include bearings, power transmission products, electrical & industrial automation, hydraulic & pneumatic components, safety supplies, etc.
Geographically, Genuine Parts Co. derives 75% of its revenues from North America, 16% from Europe, and 9% from the Asia Pacific region. In the U.S. and Europe, the company holds 7% market shares in its auto parts business, while in Canada and Asia-Pacific, it is the dominant player with 18% and 23% of the market, respectively. Regarding the industrial parts sector, GPC holds 6% of the market in North America and 17% of the market in the Asia Pacific region.
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Dividend Analysis
The stability and reliability of GPC support its capital allocation strategy, which rests on four pillars: reinvestment for growth, strategic acquisitions, share repurchases, and dividends.
Genuine Parts Company has paid a cash dividend to shareholders every year since going public in 1948. GPC is a Dividend King, having increased its annual dividend for 68 consecutive years, one of the longest streaks of annual dividend raises in the U.S. stock market.
The company’s current dividend yield is 2.6%, almost three times larger than the average for the Consumer Discretionary sector. In the past five years, the dividend has grown at a CAGR of 5.75% and is expected to continue increasing at a rate of 5.0-5.5% for years to come. The most recent dividend hike was in February 2024, when the payout was raised by 5.3%.
The safety of the dividend is supported by the company’s moderate EPS-based payout ratio of 41.2% and cash payout ratio of 58.5%, which leave the company with ample capital and cash to pursue other important capital allocations.
Genuine Parts Company’s robust financial health is another key factor supporting the outlook for continued dividend increases. The company has a medium amount of leverage, but its debt is well-covered by operating cash flow, while interest payments are covered by EBIT many times over. Its profitability metrics such as ROA, ROE, and ROIC, are among the top 20% of its industry. GPC’s operating and net margins are also much higher than average among its peers in the industry. In addition, the company generates ample cash from its operations, ending 2023 with a free cash flow of $923 million.
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Total Return Outlook
On February 15, the company reported its Q4 and full-year 2023 results. The report featured better-than-expected revenue and earnings for both periods. In fact, GPC has surpassed analysts’ EPS expectations in all quarters for which these estimates have been available, with the exception of one quarter at the onset of the Covid-19 pandemic. In the past five years, GPC’s revenues grew at a CAGR of 6.5%, while earnings-per-share increased at a CAGR of 12.9%.
In 2023, Genuine Parts grew its revenue by 4.5%, while net income per share rose by 12.3%, and net profit margin expanded to 5.7%. The company ended the year with $1.1 billion in cash and cash equivalents. For 2024, GPC expects to clock in total sales growth of 3-5%, free cash flow of $800 million to $1 billion, and an adjusted EPS increase of 4-6%.
The company announced a global restructuring program aimed at improving efficiency, which includes voluntary retirement offers in the U.S., along with rationalization and optimization of certain distribution centers and other facilities. Through these efforts, GPC expects to realize approximately $20 million to $40 million in savings in 2024.
Despite its consistently robust delivery, GPC seems to be underappreciated by a market that is hyper-focused on tech growth. Although the company’s stock rose by 33% in the past three years—reaching a record high at the end of 2022—in the past 12 months it has seen a decline of 7%.
However, this decline makes for a great entry point for value-conscious investors, as GPC’s valuations have fallen below the average for its sector and are at the bottom of the price range for its peers in the industry. In addition, Genuine Parts Company trades about 25% below its fair value, based on future estimated cash flows. These factors position the stock within the value universe, increasing its potential upside.
Notably, in addition to dividend payouts, the company’s shareholders are compensated through opportunistic buybacks. Thus, in 2023 GPC paid $261 million in cash used to repurchase 1.8 million shares under its share repurchase authorization program. The company’s management said that GPC will continue its balanced capital allocation in 2024 and beyond.
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Investing Takeaway
Genuine Parts is a stable, profitable, and well-managed company with a long track record of outstanding delivery. With a solid and growing presence in the global automotive and industrial parts industry, supported by its wide geographical network, long-term collaborations, diversified offerings, and strong brand recognition, we believe it is well-positioned to continue its responsible expansion and grow its market share. Its ability to consistently grow earnings and produce ample cash from operations supports the outlook for continued shareholder compensation for years to come. All these factors, combined with the significant value proposition stemming from its modest valuation, suggest that GPC is well-suited to be a part of long-term income portfolios.
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Disclaimer
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