In my previous analyses of Dividend Aristocrats, I featured Dover (DOV), Procter & Gamble (PG) and American States Water (AWR), each with a history of raising dividends for at least 67 years. In this discussion, I look at another dividend champion, Genuine Parts Co. (GPC, Financial), a global distributor of industrial and automotive replacement parts with over 10,600 locations worldwide. The company has consistently paid dividends to shareholders since its initial public offering in 1948, increasing them annually for the past 67 years.
Two main segments
Genuine Parts has two key business divisions: Automotive and Industrial.
The Automotive segment is responsible for distributing replacement parts for a diverse range of trucks, automobiles and other vehicles. The Industrial segment specializes in distributing a variety of industrial products, which include bearings, fluid power transmission equipment and material handling tools.
In 2022, the Automotive segment generated $13.67 billion in sales, accounting for 62% of the total revenue. The Industrial segment's revenue came in at over $8.43 billion, representing more than 38% of total sales. Profit-wise, the Automotive segment generated $1.91 billion, whereas the Industrial segment produced an excess of $886.6 million.
A decade of balanced leverage and growth
Genuine Parts has utilized a reasonable amount of leverage in its operations. As of September, its shareholders' equity stood at approximately $4.2 billion, which included $654.6 million in cash on hand. The company's total interest-bearing debt was reported at $3.3 billion, alongside $919.5 million attributed to operating lease liabilities and $198.2 million in pension and other post-retirement benefits liabilities.
Over the past decade, Genuine Parts has increased the leverage level to grow its business. Notably, its debt-to-equity ratio saw an increase from 0.18 in 2012 to 1.10 in 2023, indicating a significant rise but maintaining a level of prudence. The company's operating earnings have consistently covered its interest expenses. However, there has been a downward trend in interest expense coverage because the increase in debt outpaced the growth in operating earnings. Since 2012, the interest coverage ratio has decreased from 49.6 times to 21.8 times, which, while lower, still represents a comfortable position for the company.
High return on capital and positive free cash flow generation
Genuine Parts boasts a robust business model with a high return on capital, demonstrating impressive financial performance. Over the past decade, the company's return on capital has seen some variability, ranging between 12.35% and 29.04%. After experiencing a dip to 12.35% in 2019, the return on capital has made a noteworthy recovery, climbing to approximately 19.5% by 2022. The years 2019 and 2020 were challenging for Genuine Parts' earnings, with the company facing $100 million in merger and restructuring charges in 2019. The subsequent year, it encountered an additional $50 million in similar charges, along with a substantial goodwill impairment charge exceeding $500 million. However, as goodwill impairment is a non-cash charge, the company still produced consistently positive free cash flow. Its annual free cash flow in the past decade has stayed in the range of $614 million to $1.87 billion. This record illustrates Genuine Parts' ability to not only generate, but also increase free cash flow over time. This enduring positive free cash flow underscores Genuine Parts' robust financial foundation and operational efficiency, even in the face of economic challenges.
67 years of dividend growth
The company is renowned for its longstanding tradition of consistent dividend payments since its initial public offering in 1948, with a record of increasing its dividend each year for the past 67 years.
From 2012 to 2022, the dividend per share rose from $1.98 to $3.58, reflecting a compounded annual growth rate of 6.10%. Notably, the company has taken a prudent approach to dividend payments, ensuring they are well within its financial means rather than striving to maintain its streak at any cost. Throughout this period, the free cash flow generated annually has more than adequately covered the dividends distributed to shareholders, with the payout ratio remaining between 24.3% and 71.5%. This careful management of dividends relative to free cash flow provides investors with a sense of security and trust in the company's fiscal responsibility.
Undervalued at the moment
The Gordon Growth Model, which is particularly suited for valuing companies with a stable dividend growth history, can be aptly applied to Genuine Parts, given its impressive track record of dividend increases for almost seven decades. If we project the company will maintain its historical dividend growth rate of approximately 6%—as seen in the previous 10 years—and apply a discount rate of 8%, the intrinsic value of Genuine Parts is calculated as follows:
P = Expected Dividend for 2023 / (Required Rate of Return - Dividend Growth Rate)
= 3.58 *(1+6%) / (8%-6%)
= $190
According to the Gordon Growth Model, the intrinsic value of Genuine Parts is estimated to be $190 per share, which is substantially higher than its current trading price of $138 per share. This suggests Genuine Parts is currently undervalued in the stock market by roughly 38%.
Key takeaway
Genuine Parts stands out in the Dividend Aristocrat category with an impressive record of raising dividends since its IPO. Financially, the company has demonstrated prudent leverage management and robust free cash flow generation, showcasing strong operational efficiency and a high return on capital. Despite these strengths, the company appears undervalued in the market, with the Gordon Growth Model indicating its intrinsic value is higher than its current stock price. This suggests Genuine Parts not only boasts a solid history of financial performance, but also presents a potentially attractive investment opportunity for those looking at long-term growth and stability.
