(Published Feb. 16 by Bob Ciura)
There are a number of groupings for dividend stocks based on how long they have raised their dividends.
There are the Dividend Achievers, which have raised dividends for 10-plus years. Then there are the Dividend Aristocrats, members of the S&P 500 that have increased their shareholder payouts for at least 25 consecutive years.
As impressive as these are, there is also a much smaller group known as the Dividend Kings, consisting of just 19 stocks with 50-plus years of consecutive dividend increases.
You can see the entire list of Dividend Kings here.
Genuine Parts Co. (GPC, Financial) may not be a household name, but it has one of the longest dividend growth track records of any company in the entire stock market.
Genuine Parts has raised its dividend for 60 years in a row.
Even better, Genuine Parts is about to hike its dividend again—for the 61st year in a row.
Business overview
Genuine Parts is a distributor of automotive replacement parts, industrial parts, office supplies and more. The company operates four separate segments:
- Automotive Parts
- Industrial Parts
- Office Products
- Electrical-Electronic Materials
These are all strong brands—all four represent the number one or number two brand in their respective categories.
Source: 2016 Investor presentation, page 4
The core business is the automotive parts segment, which includes the flagship NAPA brand. This is the brand that resonates the most with consumers.
NAPA was established in 1925. It is now the largest automotive parts network in North America.
Source: 2016 Investor presentation, page 8
It also happens to be Genuine Parts’ most profitable business. Thanks to its brand recognition, the NAPA brand provides scale and pricing power for Genuine Parts.
Over the first three quarters of 2016, the automotive parts group generated a 9.1% operating profit margin. In the same period, the industrial, office products and electrical materials group posted operating profit margins of 6.5%, 7.3% and 8.4% respectively.
Genuine Parts’ market leadership has led to excellent growth rates over the long term. In fact, the company’s sales have increased in 63 out of the last 66 years.
Profits increased in 50 out of the last 55 years.
This remarkable consistency is what has allowed the company to raise its dividend for the past 60 consecutive years. It will provide the necessary growth to continue raising the dividends for many years to come.
Growth prospects
The most interesting growth catalyst for Genuine Parts is changing consumer habits.
In the past decade, U.S. consumers have held onto their cars for longer periods of time. Cars are being driven longer, which results in greater frequency of necessary repairs. The average vehicle age in the U.S. reached 11.6 years in 2015.
Instead of buying or leasing new vehicles every few years, Americans are increasingly using aftermarket parts to make minor repairs.
Source: 2016 Investor presentation, page 12
This has resulted in strong fundamentals for the aftermarket business and has sustained consistent growth for Genuine Parts over the past 10 years.
Source: 2016 Investor presentation, page 7
Going forward, the company will seek to expand its core auto parts business to the international markets.
Source: 2016 Investor presentation, page 18
Specifically, the company is building dozens of new stores in Asia, Australia and Mexico to capitalize on emerging markets.
One factor inhibiting the company’s growth is weakening demand from the industrial sector. This caused sales in Genuine Parts’ industrial parts business to decline 1% through the first three quarters of 2016.
Demand for industrial parts sagged in 2016 due to a difficult macroeconomic environment for the heavy machinery and oil and gas industries.
Source: 2016 Investor presentation, page 22
There is still an opportunity for long-term growth in industrial parts however. First, Genuine Parts claims only 7% of the industrial parts market, which is estimated to be a $70 billion market.
Source: 2016 Investor presentation, page 24
In addition, the company is pursuing acquisitions in this business to drive expansion into new categories like e-commerce and automation, which are still seeing robust growth.
Dividend analysis
Genuine Parts typically increases its dividend when it reports full-year financial results, as it did last year. As a result, another hike is likely when the company releases 2016 full-year results on Feb. 21.
For the 2017 raise, investors should expect a raise in line with last year’s 7% increase.
The beauty of Genuine Parts’ business model is that it is a cash machine. Over the first three quarters, the company generated $655 million of free cash flow.
This was more than enough to cover capital expenditures, pay down debt and raise the dividend. For example, Genuine Parts’ dividend cost the company $289 million in the first three quarters of the year.
In all, the company carried a payout ratio less than 50% in terms of free cash flow.
A payout ratio of less than half of free cash flow is very modest, which leaves plenty of room for further hikes. Additionally, there is also enough cash flow left over to buy back stock.
Genuine Parts repurchased $144 million of its own stock in the first three quarters of the year, which helps reduce shares outstanding and boosts future earnings growth.
It also helps investors know the company has a strong balance sheet. Genuine Parts has a total debt-to-capital ratio of 18.9%, which means debt is not overly burdensome on the company.
In 2015, Genuine Parts generated a return on invested capital of 16.3%, which exceeded its weighted average cost of capital by approximately 10 percentage points.
Final thoughts
Genuine Parts’ sales growth has slowed in 2016 due to slight declines in the industrial parts and electronic markets.
Nevertheless, the company has a long, proven ability to navigate economic cycles and maintain its dividend growth each year.
Thanks to its high returns on capital, strong balance sheet and low payout ratio, there is ample room for another 5% to 7% dividend increase in 2017.
Genuine Parts is not the only Dividend King expected to raise its dividend soon—Coca-Cola (KO, Financial) is likely to raise its own dividend at some point in the next few days.
Disclosure: I am not long any of the stocks mentioned in this article.
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