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
Genuine Parts Company (NYSE: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.
Disclosure: None
