2023-10-27 10:00:00 ET
Summary
- Genuine Parts Company is a dividend stock that has been overlooked but may deserve a spot in investors' portfolios.
- GPC has a long history of navigating economic downturns having been public since 1948.
- The company has an impeccable dividend track record with 67 years of dividend increases and a safe payout ratio.
- They also have been making acquisitions in the last few years to continue modernizing and grow their business.
- GPC's price recently declined due to disappointing sales in the automotive & industrial segments.
Introduction
They say a picture is worth a thousand words. Well the one above symbolizes me as I look forward to collecting cash from my dividend stocks. While many investors are pulling money out of the market to place into 90-day T-bills or wait until sentiment turns positive, I will continue to collect my cash. This method of short-term thinking has given me and others the opportunity to buy quality stocks at a discount. I've also been searching for high-quality stocks that I don't own currently as they may become future holdings for me.
One stock I came across recently was Genuine Parts Company ( GPC ). The stock is down double-digits over the last year. It's one of those dividend payers that you don't hear or read about too often. Those are the ones I love the most, the ones that have been around for decades but are rarely talked about. The ones that fly right under the radar.
The reason being is it's easier to get these at fair value on sale or at a large discount during economic uncertainty. At the same time popular stocks often become overvalued, especially those in certain sectors as they are considered safe-haven stocks. GPC is a dividend stock that is rarely talked about but in this article, I explain why they may deserve a spot in your portfolio.
Why GPC?
The company has been around since 1928 and is headquartered in Atlanta, Georgia. They currently have more than 10,000 locations in 17 countries and distribute automotive & industrial replacement parts. They're located in countries like Ireland, Spain, Canada, Germany, and Mexico to name a few. So, they have a pretty large presence globally. The company IPO'd in 1948 so they have been around for quite some time. Not only that, they have an extensive history of navigating through economic downturns. GPC has been through the Black Monday of 1987, where the market crashed 22.6% making it the biggest single day decline in history. They've also been through the dot.com crash in 2000, the GFC, and the most recent Coronavirus flash crash of 2020.
When looking for dividend stocks, I'd rather find those that have long histories and a dividend track record to go along with it. I look at my stocks how I would view hiring someone to work for my company. Essentially it's the same thing. You're hiring or in this case buying stocks to continue to perform to grow your business, or create an income stream. Depending on the job, would you rather hire someone straight out of college, or someone who has been working in that field for an extensive period?
A degree is great, and often required. But nothing beats experience. No matter how you cut or slice it, you can't take that away. And with experience comes knowledge. Knowledge on how to be better prepared for the next downturn that will eventually happen. Additionally, people need their automobiles. Always have and always will. So yes, I know these businesses are often overlooked and considered boring, but I love boring and conservative. Throw in a fair valuation and you have my attention.
Recent Earnings
GPC reported its Q3 earnings recently and the stock experienced a decline of 12.5%. They were trading above $150 but the share price quickly slid due to weak sales and a miss on revenue. As you can see below , net sales were slightly down quarter-over-quarter in automotive & industrial segments. Total sales were $5.8 billion with the industrial segment accounting for $2.2 billion and automotive accounting for $3.6 billion. Industrial's performance was up just 0.6% while automotive's was up 3.9%.
Although I think these are some solid numbers considering the current macro environment, North America sales were disappointing at just 1.7% combined. But both segments posted some decent numbers internationally. Australasia sales were up double-digits at 14.1% in the industrial segment while Europe's performance was impressive as well, posting 10.9% growth in total sales. This marked the 8th consecutive quarter of double-digit growth for them.
As mentioned earlier, revenue also missed analysts' estimates by $88.52 million, coming in at $5.8 billion. Gross margins of 36.2% also improved by 130 bps while EPS remained the same as last quarter at $2.49. But this was up from $2.20 a year ago, so again, not bad considering the environment. As investors, I think a lot of us sometimes have unrealistic expectations for our companies. Businesses will have some great quarters, good quarters, and not so good quarters. It's just the nature of the business. But like I always say, some growth is better than no growth at all.
Impeccable Dividend Track Record
The metric that impressed me the most about GPC was their dividend track record. There are not too many companies with more than 60 years of dividend increases, and GPC is a part of that prestigious list. This includes the likes of Colgate-Palmolive ( CL ), Coca-Cola ( KO ), Dover ( DOV ), and Procter & Gamble ( PG ). This dividend king currently has 67 years of increases. And the dividend has been well-covered by earnings and free cash flow. Since 2013, FCF has averaged roughly 53% with the exception of last year where the ratio was elevated above 80%. But this was not a performance issue for GPC. In 2022, they acquired Lausan, a European company. I expect the FCF payout ratio to remain elevated as GPC expects to spend more on CAPEX going forward with acquisitions.
Management expects this to be in the range of $375-$400 million for the year and recently announced the acquisition of Gaudi, one of the largest independent players in Spain. This is expected to be accretive to the European business post synergies. Furthermore, free cash flow is expected to be somewhere between $900M-$1.0 billion. YTD, GPC has paid out $393 million in dividends while FCF has come in at $733 million, giving them a payout ratio of roughly 54%, which is very safe. Unless it's a REIT, I like to see payout ratios between 40% to 60%.
Healthy Balance Sheet
At the end of Q3, GPC had $2.2 billion in liquidity and a Net debt to adjusted EBITDA of just 1.6x, well below their targeted range of 2-2.5x. This is expected to decrease to 1.37x over the next year. As you can see the company's debt has increased significantly in the last 6 years, but they also have made numerous acquisitions since then to continue modernizing and driving long-term growth for the business. And with a low net debt to EBITDA, investors shouldn't worry about GPC's balance sheet in my opinion.
Risks & Valuation
Tightening market conditions and higher interest rates have impacted the business and although inflation has moderated a bit, I expect this to be a headwind going forward. With a high chance of a rate hike at the next FED meeting, this will certainly have an effect on GPC's customers as they remain more cautious. If a rate hike is implemented, this may also have an impact on sales, especially in the North American segment. In the 3rd quarter automotive sales declined by 1% in North America with comparable sales down 2.9%. Fill rates were also below the company's acceptable levels, but management has implemented a plan to combat this with new leadership.
With all this being said, this will likely continue to suppress GPC's share price, creating a better buying opportunity. I like to dollar-cost average into my stocks, so a lower valuation is something I won't complain about from a high-quality company such as GPC. At its current valuation they offer 22% upside to its price target of $157. Their trailing P/E of 14.44x is also lower than the peer average of 17.22x when you compare it to LKQ Corp ( LKQ ) and Pool Corp ( POOL ).
Using the Dividend Discount Model, I have a price target of $137, below analysts' estimates. Accounting for the expected recession I decided to be a bit more conservative and use a growth rate of 5%, below the average of 6.16%. At the current price of $128, this gives investors roughly 7% upside. If the FED hikes rates by .25 bps like many are expecting, I see GPC's price continuing to decline due to its low yield. So those who want a greater margin of safety, you may consider waiting for a better entry point. Those with a longer-term outlook I think GPC is trading at a good price as their forward P/E is below their 5-year average of 18x.
Bottom Line
GPC is a boring, conservative dividend stock that is perfect for investors looking for dividend growth and potential capital appreciation. Automotive stocks like GPC are often overlooked but I believe they can be hedges against downturns. People will always need their automobiles and the parts associated with them. Additionally, GPC has a long dividend history of 67 years which is something not a lot of companies can claim. Furthermore, they have been making more acquisitions to continue modernizing and growing the business for the long-term. With their long history, recession-resistant business model, and healthy balance sheet, I rate the stock a buy.
For further details see:
Genuine Parts Company: The Type Of Dividend Growth Stock You Need Right Now