The one benefit to the violent decline in markets over the past several weeks is that many dividend-paying stocks are now offering yields not seen in quite some time.
Take Genuine Parts Co. (GPC, Financial) for example. The automotive and industrial parts company has increased its dividend for 64 consecutive years, earning it a place among the Dividend Kings, those stocks with at least 50 consecutive years of dividend growth. Genuine Parts has the fourth-longest dividend growth steak among U.S. companies, according to The Dividend Investing Resource Center.
Genuine Parts has experienced eight previous recessions and still was able to raise its dividend. The stock also offers a current yield that has rarely been seen in except in weak economic environments.
Here’s why investors should consider purchasing Genuine Parts today.
Growth prospects
Genuine Parts is a global leader in automotive aftermarket products, industrial parts, electrical materials and business products. The company conducts business in the U.S., Canada, Mexico, France, the U.K., Germany, Australia and New Zealand. Genuine Parts has more than 3,100 store locations, more than 25,000 repair center partnerships and 55,000 employees worldwide.
The global market for automotive aftermarket parts and services is massive.
Source: Investor Presentation, slide 10.
As you can see, the global automotive aftermarket industry is estimated to be $200 billion, with approximately 63% of this market located in the U.S.
This industry is also highly fragmented as there are many large and small players within the automotive aftermarket vying for consumers’ business. Genuine Parts has a leadership position in each country that it operates thanks to its global reach. The company’s vast network of store locations and repair centers help ensure that Genuine Parts’ parts are available to meet consumers’ needs.
Given the age of cars, it is likely that consumers will require replacement parts for the vehicles.
Source: Investor Presentation, slide 14
The average age of a vehicle in the U.S. is nearly 12 years, with more than two-thirds of vehicles at least six years old. This is also the prime age for aftermarket repairs. As vehicles age, they will likely require more repairs. This will bode will not only in a strong economy, but also in a recession.
Recession performance
If the economy is entering a recession, and the declines in the market indexes indicate that we are or are close to doing so, then Genuine Parts is likely to weather a harsh economic environment much better than most companies.
Consumers often prioritize spending in a recession and a purchase of a brand new or slightly used car likely isn’t on the table for most people. This means that consumers must make the necessary repairs on their existing vehicles. Consumers will need to keep their vehicles in working condition and Genuine Parts has the market leadership and global reach to meet their needs.
Genuine Parts has proven fairly apt at holding its own during challenging economic times. Below are the company’s earnings per share results for the time period before, during and after the last recession:
- 2007 earnings per share: $2.98
- 2008 earnings per share: $2.92 (2% decrease)
- 2009 earnings per share: $2.50 (14.4% decrease)
- 2010 earnings per share: $3.00 (20% increase)
- 2011 earnings per share: $3.58 (19.3% increase)
- 2012 earnings per share: $4.14 (15.6% increase)
Genuine Parts suffered a slight decline in 2008, before a sharper decline in 2009. But the company managed to produce a new high for earnings per share the very next year and has spent much of the time since growing. In fact, since the last recession, Genuine Parts has grown earnings in nine out of last 10 years. The company’s sales decreased 7.2% peak to trough in the last recession, but have improved in eight out of the last 10 years.
The top and bottom-line declines were better than the experience of most companies during the last recession. This is a tribute to the company’s business model and is one of the reasons that Genuine Parts has been able to increase its dividend for more than six decades.
Dividend and valuation analysis
Genuine Parts increased its dividend by 3.6% for the upcoming April 1 payment. The company has increased its dividend by an average of:
- 5.1% per year over the past three years.
- 5.5% per year over the past five years.
- 6.6% per year over the past 10 years.
There’s no denying that the most recent increase was much lower than the averages listed, but I find Genuine Parts’ dividend to be extremely safe.
The company’s is expected to pay out $3.13 of dividends per share this year while producing earnings per share of $5.74, which equates to a payout ratio of 55%. This is near the high end of the company’s payout ratio over the last decade, but still in a very healthy spot. For context, the average payout ratio over the last 10 years is just under 52%. This is evidence of how conservatively managed Genuine Parts’ dividend is.
Genuine Parts distributed $439 million in dividends last year while generating free cash flow of $594 million, for a free cash flow payout ratio of 74%. This payout ratio is higher than the EPS payout ratio, which is likely why shareholders received a lower than usual dividend increase. The average free cash flow payout ratio was 51% for the years 2016 to 2018. The payout ratio for 2019 was elevated, which is something investors should monitor going forward.
However, Genuine Parts has proven very successful at managing its business and raising its dividend over the last 64 years that I feel quite comfortable the company’s dividend isn’t in danger of being cut.
Shares of Genuine Parts yield 5.2% as I write this. The stock hasn’t yield more than 5% outside of the dotcom bubble and the Great Recession. Even in those periods, the stock never averaged above a 5% yield for the entire year.
Genuine Parts has yielded an average of:
- 2.9% over the past five years.
- 3.0% over the past 10 years.
- 3.2% over the past 15 years.
The current yield is well above any of these long-term averages and nearly doubled the average yield of the S&P 500. Simply put, this is a dividend yield that is rarely seen except for recessionary periods of time. They have almost always been a good time to buy the stock as the yields didn’t remain that high for very long
Shares are also cheap today. The stock closed Monday at $60.81. Using earnings per share of $5.69 for 2019 and expected earnings per share of $5.74 for the current year, shares have a trailing price-earnings ratio of 10.7 and a forward price-earnings ratio of 10.6. This is below the average multiples that the stock had during the last two recessions. The market’s valuation of Genuine Parts appears to believe that the current economic environment will be worse for the company than the last two recessions.
Is that possible that this time will be worse for Genuine Parts? Certainty, but due to the factors working in the company’s favor, like a strong business model, demand for aftermarket parts and dividend history, make me believe that Genuine Parts is worth more than its currently trading for.
Over the last decade, the stock has had an average price-earnings ratio of 17.7. Due to current uncertainty in the marketplace, lets lower our target multiple to a range of 13 times to 15 times earnings. Using current estimates, Genuine Parts would then be worth $75 to $86 per share. This range would offer returns of 23% to 41% from current levels. This expected return does not include the dividend, which would still yield 3.7% even at the high end of the price range. This is a very strong potential total return.
Final thoughts
The market selloff has afforded investors the opportunity to purchase stocks at rarely seen yields. Genuine Parts is a good example of that as the stock yielded above 5% as of Monday. There are just two other times in more than 30 years that this has happened. Each time was during a recession. Even through this difficult time, and many before it, Genuine Parts was able to raise its dividend to shareholders. Those holding for long periods of time have been rewarded with both share price appreciation and annual dividend growth.
Genuine Parts’ business model has allowed for this dividend growth. The company has a large percentage of a fragmented industry, giving it a powerful position even in challenging periods of time.
Because of its business model, recession resiliency and dividend history, I rate shares of Genuine Parts as a strong buy. Investors looking for a high level of income should consider adding the stock to their portfolio.
Disclosure: Author is not long Genuine Parts, but may initiate a position in the next 72 hours.
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