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Genuine Parts: Higher Dividends Since 1957

Founded in 1928, Genuine Parts Company (GPC) is one of the largest replacement part makers in the automotive, industrial, and office equipment industries.

The company markets its products through a global network of distribution centers and retail outlets, including thousands of NAPA and Alliance Automotive Group auto parts stores.
 
The firm's most important business segments are its automotive (56% of sales) and industrial units (34%), which combine to account for 90% of company-wide sales and profits. Business products generate the other 10%.

By geography, the U.S. represents the company’s largest market, generating 74% of revenue. Europe (10%), Canada (9%), Australasia (6%), and Mexico (1%) account for the remainder. 

Genuine Parts has paid higher dividends every year since 1957, making the company a dividend king.

Business Analysis
Genuine Parts has raised its dividend each year for more than six decades, an impressive achievement made possible by two of the firm's main competitive advantages: trusted brand names and a large distribution network.

Most of the company's businesses have existed for a long time, helping Genuine Parts build brand equity and develop lasting relationships with customers. 

For example, NAPA Auto Parts (GPC's primary automotive business) was founded in 1925, Motion Industries (GPC's industrial business) began in 1946, and S.P. Richards (GPC's office products division) predates the Civil War.

Thanks in part to its longevity, Genuine Parts is a leading distributor with No. 1 or No. 2 market share positions in most of its primary end markets. Customers continue doing business with the firm because of the convenience it provides.

Genuine Parts serves as a one-stop shop for customers so they can quickly get almost any product they need. The firm's auto business carries more than 500,000 replacement parts, Motion Industries offers over 7 million industrial products, and S.P. Richards has nearly 100,000 office items available for sale.

In the automotive market, inventory breadth and fast distribution are especially important for professional clients such as repair shops. These customers account for about 80% of Genuine Parts' automotive sales.

Car mechanics deal with all types of jobs that require many different parts. It would be impractical for them to maintain all of the inventory required to carry out their work given the substantial capital investment that would require.

Similarly, an auto parts store doesn't want to maintain endless amounts of inventory either. As a result, lean inventory management and just-in-time delivery are paramount when it comes to ordering components to complete repair jobs.

Genuine Parts' large network of global distribution centers makes it easy for customers to order parts at a moment’s notice and have them generally delivered the same day, maximizing their inventory turnover, sales, and profits.

As the global leader in automotive aftermarket, Genuine Parts can afford to hold more inventory and offer better delivery times than many of its competitors. Coupled with the NAPA's brand quality reputation, this helps the company maintain greater customer loyalty.

In addition, auto parts and industrial components are somewhat price inelastic, meaning that customers care more about the reliability of products and delivery convenience than they do about getting the absolute lowest price. This is partially because professional clients tend to pass on higher prices to their customers, helping Genuine Parts maintain its brand and moderate pricing power over time. 

Once a customer establishes a relationship with Genuine Parts, the company essentially enjoys a stream of recurring revenue. Vehicles and equipment break down over time and need to be repaired or maintained, creating an ongoing need for the company's replacement parts and inventory management systems.

Due to the less discretionary nature of the aftermarket business, Genuine Parts has enjoyed steady growth. In fact, the company's sales have increased in 86 of the last 91 years, and Genuine Parts' profit has also gained in 75 of those years.

Combined with management's conservative payout ratio target of 50% to 55%, and it's no wonder why Genuine Parts' dividend has grown so steadily over time.

Looking ahead, Genuine Parts expects its automotive aftermarket business to continue benefiting from the improving reliability of vehicles. This allows consumers to own cars for longer, but only if they are properly maintained and repaired. As cars age, the cost to repair them increases, generating more demand for replacement parts.

However, the biggest part of Genuine Parts' growth story is acquisitions since the markets the company competes in are large and highly fragmented. 

For example, Genuine Parts pegs the global automotive aftermarket at $200 billion in size, giving it less than 10% share (including in the U.S.). Meanwhile, the industrial components market is over $80 billion in value, and despite having No. 2 market share, Genuine Parts commands just 8% of total global sales.

Genuine Parts has averaged more than a dozen acquisitions annually in recent years, driving almost all of the company's sales growth. Given its relatively small market share, continued bolt-on acquisitions could serve as a reliable growth runway for years to come. 

After buying a company, Genuine Parts can eliminate duplicate costs and expand its profitability over time thanks to its larger economies of scale. Acquisitions also provide opportunities for the firm to create a denser distribution network and fill any holes in its product portfolio.

If all goes well, management expects Genuine Parts can generate 6% to 8% annual revenue growth while increasing its operating margin and growing EPS at a somewhat faster rate. The company's dividend would likely continue growing at a mid-single digit pace under these assumptions. 

Overall, Genuine Parts' businesses seem to operate in slow-changing industries and maintain leading positions because of their extensive distribution networks (just-in-time delivery), wide range of products, brand recognition, and long-standing customer relationships.

Combined with its conservative payout ratio and solid cash flow generation even during economic downturns, Genuine Parts appears to be a potentially solid choice for conservative dividend growth investors. However, there are several risk factors to consider.

Key Risks
Genuine Parts' impressive growth record points to a durable business, but there are nonetheless several risks to keep in mind.

First, Genuine Parts is an acquisition-happy company, due to the fragmented nature of its industry. While it usually buys small companies, its $2 billion bet on Alliance Automotive in 2017 shows the firm is not afraid to occasionally make bold strategic bets. 

Besides its size, this deal was notable because it shifts more of the company's mix into Europe, a region where Genuine Parts has not had much of a presence until recently. Management's track record on M&A is solid, so the company deserves the benefit of the doubt for now. 

However, large-scale international expansion still comes with plenty of risks that need to be monitored going forward, especially if the company tries to make more large deals in the future.

Genuine Parts' business can also be impacted any given quarter by volatile currency rates (about 25% of the business is outside of the U.S.), industrial production trends, and the health of the auto market.

While the aftermarket business is generally much steadier than the broader economy, the company’s industrial business is less predictable because the industries in which it operates can be highly cyclical, resulting in sales and earnings growth that can be a bit lumpy.

However, none of these factors seem likely to impair the company’s long-term earning power.

Amazon is also worth a mention when discussing threats to distribution-based businesses. Genuine Parts appears to possess several advantages that seem to insulate its business from Amazon.

On the automotive side, Genuine Parts primarily sells to professionals, and the NAPA brand accounts for about 90% of its U.S. aftermarket products. NAPA is trusted by shops and consumers, and having nearby brick-and-mortar locations can help customers ensure they purchase and receive the right part quickly.

It would probably be hard for even Amazon’s network to rival Genuine Parts' given the quick turnaround times demanded by customers and the brand equity Genuine Parts Company has built up over the decades.

Another longer-term risk to keep in mind is that NAPA specializes in components for traditional, internal-combustion engine (ICE) vehicles.

In the coming decades, electric vehicles could account for a large and fast-growing segment of the global vehicle market. Electric vehicles are generally more reliable and less maintenance intensive than ICE cars because they have simpler designs. As a result, cars may last longer and require less aftermarket parts in the future.

Fortunately, this risk doesn’t seem like one that will materially impact the company for many years, if not decades, given the low penetration rate of electric vehicles today. The same is true for driverless cars, which could reduce vehicle ownership.

At the end of the day, the company’s large, fragmented, and slow-changing markets help mitigate most of these risks. Over the short- to medium-term, the biggest area to watch is Genuine Parts' ability to profitably grow its business in international markets. This is critical to the company's ability to achieve management's long-term financial targets. 

Closing Thoughts on Genuine Parts Company
Genuine Parts generates consistent free cash flow, maintains a conservative balance sheet, operates in a slow-changing industry, sells relatively recession-resistant products (as far as industrial firms go), and has grown its dividend for more than 60 consecutive years. 

As a diversified global distributor, the company should continue to benefit from serving a broad range of fragmented markets as well, especially with new growth opportunities presented by its acquisition of Alliance Automotive Group. 

Simply put, Genuine Parts seems likely to remain a reliable dividend grower. While the company's growth numbers will never dazzle shareholders, a slow and steady pace appeals to many conservative income investors.

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