Genuine Parts Company (GPC) has grown its sales in 63 of the last 65 years and increased its profit in 50 of the last 54 years. How many of your holdings can make those claims?
GPC also has a 3.1% dividend yield and has steadily increased its dividend for 59 consecutive years with dividend growth averaging 7% per year over the past decade.
Very few companies have such a proven track record of steady growth, but GPC offers even more than that. This is the type of company we look for in our Top 20 Dividend Stocks portfolio.
Business Overview
GPC was founded in 1928 and distributes automotive replacement parts, industrial replacement parts, office products, and electrical materials. Its products and services are offered through a network of approximately 2,600 operations throughout the U.S. (82% of sales), Canada (10%), Mexico (1%), Australia (7%), and New Zealand.
By segment, GPC generated 53% of its 2014 sales from the automotive market (under the NAPA brand – GPC owns about 1,100 of the 6,000 NAPA stores it delivers to), 31% from industrial markets, 11% from office products, and 5% from electrical materials.
Business Analysis
GPC’s primary competitive advantages are its extensive distribution network, breadth of products, long-standing customer relationships, and brand name reputation.
The company is a leading distributor to its four primary end markets with #1 or #2 market share positions in every segment. As one of the largest players, GPC can afford to hold more inventories and offer better delivery times than many of its competitors.
The company maintains about $3 billion worth of merchandise on its balance sheet. Its automotive parts business provides access to nearly 459,000 products and its industrial parts business offers access to more than 5.9 million industrial replacement parts and related supplies. To effectively compete with GPC’s leading coverage of products, new entrants would need to invest significantly in inventory.
GPC’s network of distribution centers and supply chain management expertise are additional advantages. The company’s auto business has the largest auto parts network in the U.S. with 60 distribution centers that deliver products to about 6,000 NAPA Auto Care stores.
These distribution centers must be conveniently located and are able to offer 24/7/365 product delivery. Over time, GPC has built a strong reputation for selling quality parts in a timely, cost-effective manner. It’s also worth noting that roughly 90% of GPC’s auto aftermarket parts are branded with the NAPA name, building up meaningful brand value and customer trust. Many of GPC’s key accounts (e.g. AAA, Goodyear, Firestone, Midas) could not be effectively served by smaller players in the market.
The auto aftermarket industry is roughly $100 billion in size but highly fragmented. GPC’s leading market share of 8-9% leaves plenty of room for continued consolidation via organic growth and acquisitions (acquired products can be leveraged across GPC’s large distribution network).
GPC’s industrial business has been in business for nearly 70 years and benefits from many of the same factors. It also differentiates by maintaining industry-leading e-business capabilities. This segment’s market is $70 billion in size but very fragmented – GPC’s market share is just 6%.
Unlike selling to original equipment manufacturers, aftermarket business is relatively stable. Vehicles and equipment breaks down and must be replaced. Therefore, the business is less discretionary. Through last year, GPC’s sales increased in 63 of the last 65 years, and its profit grew in 50 of the last 54 years.
While GPC has helped itself with strategic acquisitions and organic growth, it has also gotten lucky from favorable industry trends in the automotive aftermarket space.
As seen below, the average age of all light vehicles has increased by nearly 50% over the last 20 years. When consumers maintain older vehicles, more money is spent on repairs and aftermarket parts and services. GPC says that prime years for aftermarket repair start in the sixth year of a vehicle’s life and estimates that the automotive aftermarket sector will grow 1-2% per year going forward. Low gas prices are also resulting in more miles being driven, which results in more aftermarket business.
Source: General Parts Company Investor Presentation
In summary, GPC’s businesses operate in slow-changing industry and maintain dominant market share positions because of their extensive distribution networks (just-in-time delivery), leading range of products, brand recognition, and long-standing customer relationships.
Key Risks
GPC’s business can be impacted any given quarter by currency rates (roughly 20% of the business is overseas), industrial production trends, and the health of the auto market. However, none of these factors seem likely to hurt the company’s long-term earnings power, and the aftermarket business is generally much steadier than the broader economy.
The bigger risks to owning GPC would likely be if its model came under attack as a result of secular changes in the way cars are made (e.g. with higher quality materials and less parts, resulting in fewer repairs needing to be made) or driven (e.g. self-driving vehicles would presumably get in fewer car accidents and be driven more responsibly, reducing needs to repairs). If the average vehicle age starts to retreat back to levels in the 1990s, that could also reduce GPC’s growth rate.
E-commerce could be a threat as well, although GPC seems well positioned for this theme with its own websites.
The company’s large, highly fragmented, slow-changing markets help mitigate these risks.
Dividend Analysis
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. GPC’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
GPC has one of the safest dividend payments you can find with a Safety Score of 96. Over the last four quarters, GPC’s dividend has consumed 53% of its earnings and 37% of its free cash flow. These payout ratios are pretty consistent with the company’s long-term payout ratios (see below) and provide GPC with a nice cushion and room for dividend growth.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
GPC’s sales have been pretty steady, too. During the financial crisis, the company’s revenue dropped by just 9% and earnings fell by 16% in 2009. GPC’s stock also performed relatively well, outperforming the S&P 500 by 22% during 2008.
As we mentioned earlier, GPC’s sales have increased in 63 of the last 65 years, and its profit has grown in 50 of the last 54 years. The company’s consistency has been remarkable, and demand for aftermarket replacement parts and services is fairly recession-resistant.
Source: Simply Safe Dividends
GPC’s operating margins have been extremely consistent as well, generally remaining between 7% and 8% over the last decade. They only dipped slightly during the recession, highlighting the strength of GPC’s business model.
Source: Simply Safe Dividends
Not surprisingly, GPC generates substantial free cash flow that can be used on acquisitions or returned to shareholders via share repurchases and dividend increases. It’s also worth noting that distributors’ free cash flow actually increases during recessions because they do not need to replenish as much inventory, converting more of their working capital into cash.
Source: Simply Safe Dividends
Finally, GPC’s balance sheet is also in decent shape. As seen below, long-term debt has accounted for less than 20% of the company’s total capital in each of the last 10 years. The company has about $200 million in cash compared to $625 million in debt. All of its debt could be retired with cash on hand plus about half of a year of GPC’s earnings before interest and taxes (EBIT). GPC’s balance sheet has the flexibility to acquire more companies for growth, raise its dividend, and/or repurchase more shares.
Source: Simply Safe Dividends
GPC’s dividend is one of the safest in the market. The company maintains healthy payout ratios, sells recession-resistant products, benefits from a slow pace of change in its markets, has a conservative balance sheet, and reliably generates free cash flow in any environment.
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
GPC’s dividend Growth Score is 71, suggesting that the company’s dividend growth potential is above average. 2015 marked GPC’s 59th consecutive year of increased dividends paid to shareholders, more than doubling the dividend growth requirement to be part of the S&P Dividend Aristocrats Index and also making it a member of the exclusive Dividend Kings list (companies that have increased their dividends for at least 50 consecutive years).
GPC has paid a cash dividend to shareholders every year since going public in 1948 and most recently increased its dividend by 7% in early 2015. Its 60th consecutive dividend increase will be announced in the first half of 2016.
As seen below, the company has consistently raised its dividend by about 7% per year. Assuming the company continues to grow its earnings at a high-single digit rate like it has throughout history, we expect a similar rate of dividend growth to continue. A safe 3.1% dividend yield with upper-single digit dividend growth isn’t the worst thing for investors living off dividends in retirement, although a somewhat higher yield would be nice.
Source: Simply Safe Dividends
Valuation
GPC trades at about 16x forward earnings and offers a dividend yield of 3.1%, which is somewhat higher than its five year average dividend yield of 2.7%.
GPC believes it can grow its earnings by 7-10% per year, which implies total return potential of 10-13% per year. The stock appears to be no more than fairly valued today.
Conclusion
GPC is practically the definition of a blue chip dividend stock. It generates consistent free cash flow, maintains a conservative balance sheet, operates in a slow-changing industry, sells recession-resistant products, and has grown its dividend for nearly 60 consecutive years. It’s hard to find a more reliable dividend grower than GPC. While its growth numbers will never dazzle shareholders, slow and steady wins the race.
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