Genuine Parts just released its third quarter results with record sales totaling $4.0 billion were up 8% compared to the third quarter of 2013. EPS were also up by 11% ($1.24 vs $1.12).
We will go through the main highlights of their reports, but first, we will analyze what Genuine Parts has been doing over the past five years and determine whether or not it should be part of your dividend portfolio.
This dividend aristocrat has not only increased its dividend payment since 1957, it clearly shows growth on all fronts: revenues, earnings and dividend payments. GPC forecasts a revenue growth of 7-8% for this year. Following the first 4 Dividend Stocks Rock Investing Principles, I’ll take a look at Genuine Parts and share a full dividend analysis.
Principle #1 High Dividend Yield Doesn’t Equal High Returns
Did you know that the highest dividend yield stocks underperform more “reasonable” yielding stocks? The Hartford Mutual Funds company wrote:
The study found that stocks offering the highest level of dividend payouts have not performed as well as those that pay high, but not the very highest, levels of dividends.”
As a dividend aristocrat, we can’t really expect GPC to pay a very high dividend yield. However, I was surprised to see that GPC paid more than a 4.50% yield not so long ago (in 2010).
GPC now shows a relatively high PE ratio at 20.17. It was trading at 14.45 back in 2010 when the yield was higher. Therefore, even if the dividend went from $1.65 in 2011 to $2.225 now, the price went up accordingly. However, the dividend growth of this stock is very interesting…
Principle #2: If There is One Metric; It’s Called Dividend Growth
If I had to go blindfolded to pick a stock and have only one metric to look at, I would pick dividend growth. This is the most important metric to me as it is a clear sign of the company’s financial health and its ability to pay me for years to come. Here’s an interesting quote from Saturna Capital:
“Indeed, dividend growth has been a much larger determinant of equity returns in this new era of low benchmark rates and higher levels of uncertainty.”
If you wonder about dividend growth for GPC, you can see what they are posting on their own website:
The dividend will probably double (or be very close) within 10 years, which makes an annualized dividend growth rate of ±7%. After 58 consecutive years with a dividend increase, it’s not a surprise that GPC shows almost twice the growth of the S&P 500 over the past 5 years (+131.19% vs +73.46%). Now, can GPC continue to please dividend investors in the upcoming years?
Principle #3: A Dividend Payment Today is Good, A Dividend Guaranteed For the Next 10 Years is Better
I think it’s very important to cross the payout ratio with the dividends paid over at least 5 years to see where the company is going with its dividend policy. When I did the exercise with GPC, I noticed that it was able to push its dividend on a steep uptrend while decreasing its payout ratio.
GPC could have paid even more to investors but management preferred to keep additional cash flow to ensure sustainable growth. This tells you a lot about how this company is managed. The additional cash is also use to ensure growth for the future.
GPC not only shows good results but also grows by acquisition. In 2014, they bought Garland C. Norris, EIS, Electro-Wire and Impact products. GPC continually looks for companies to buy with revenues in the range of $25M to $125M. These bites are easy to chew on and don’t affect their balance sheet in a negative way. Their ability to integrate new companies reflects in their earnings which show a steep uptrend. GPC will continue to be a leader in its industry and we won’t lack for car parts in the near future.
Principle #4: The Foundation of Dividend Growth Stocks Lies in its Business Model
A company that doesn’t have a sound business model won’t be able to sustain consecutive dividend increases over the long haul. On the other hand, businesses which pay dividends and increase them will outperform other stocks:
Now how can you find these marvels? This is why you need other financial metrics to identify companies that will be able to sustain and increase their dividend for the next 10 years. At DSR, we look at the 3 and 5 year metrics for Sales and Earnings per Share (EPS) growth. We only select companies showing positive growth over both the 3 and 5 year periods. Since an economic cycle lasts between 5 and 8 years, a strong company should be able to post increasing sales and earnings over these periods. I’m using both EPS and Revenue data from Ycharts:
DSR STOCK METRICS
3 year revenues = 7.90% Pass
5 year revenues = 5.03% Pass
3 year EPS growth = 13.60% Pass
5 year EPS growth = 8.56% Pass
Genuine Parts Company passed the four tests easily. The automobile parts industry is relatively stable and GPC benefits from its leadership position to generate consistent cash flow. It’s important distribution network combined with great locations and branding makes it a very strong company. In addition to this solid business model, GPC has the ability to generate more growth through acquisitions. This company is continuously buying smaller players and has become a pro at integrating acquisitions to create more synergy.
A Look at the Most Recent Results
For the first nine month of the year, sales are up 9% compared to the same period in 2013 and EPS are up by 2.92%. If we include an adjustment related to the acquisition of GPC Asia Pacific in 2013, the EPS would have been also up by 10% for the same period. This tells you GPC’s business model works well in a bullish environment. GPC doesn’t only grow by acquisition. When you look down on where the sales boost come from, you will find that 5.4% is coming from internal growth and 3.3% from acquisition. Genuine Parts is having a small bite of acquisition at a time and does a great job handling its own growth. Management keeps in mind its cash flow statement along with its strong balance sheet.
GPC finished its third quarter by increasing its FY2014 earnings guidance to $4.56-4.60 and sales of $15.2 billion. GPC is definitely a good addition to a dividend portfolio!
Disclaimer: I do not hold personally GPC shares at the moment of writing this article. However, GPC is held in some Dividend Stocks Rock Portfolios.