This Dividend King Has Increased His Payout Yet Again: Should You Buy It?
Ihe last month, the stock of automotive and industrial spare parts Authentic parts (NYSE: GPC) announced that it would send a lot more money to shareholders.
Genuine Parts increased its quarterly dividend per share by 9.8% to $0.895. This extended his streak of dividend growth to a tie for second place among the Dividend Kings for 66 consecutive years.
Let’s see if a dividend growth investor should buy shares of Genuine Parts by looking at its fundamentals and valuation.
Breathtaking earnings growth for a nearly century-old company
Genuine Parts released impressive results for the year ended Dec. 31 last month. The company posted a strong rebound in net sales in the pre-pandemic year of 2019 and record non-GAAP (adjusted) diluted earnings per share (EPS).
Genuine Parts reported net sales of $18.9 billion in 2021, representing a growth rate of 14.1% over the prior year. Perhaps more appropriately, net sales of Genuine Parts were just 2.7% lower than the $19.4 billion generated in the pre-pandemic year of 2019.
But that doesn’t paint the full picture, as Genuine Parts completed the sale of its commercial products business known as SP Richards in June 2020. of Genuine Parts posted a growth rate of 7.7% over 2019.
So what made the company’s net sales rebound in 2021?
The lag in semiconductor chip manufacturing capacity before the COVID-19 pandemic and an increase in demand for semiconductor chips resulted in a shortage of chips in 2021. For context, the average inventory of semiconductor chips fell from 40 days in 2019 to less than five days at its worst point last year. This has forced automakers to cut production by 7.7 million cars in 2021.
Significantly higher demand for used car replacement parts has boosted the NAPA and Alliance Automotive Group brands of Genuine Parts. That helped revenue from the company’s automotive segment soar to $12.5 billion in 2021, up 15.5% from a year ago. It was also 14.2% higher than the segment’s net sales in 2019.
And the recovery in demand for industrial aftermarket parts has helped Genuine Parts’ Motion Industries brand. This explains how the industrial segment generated $6.3 billion in revenue in 2021, a growth rate of 11.4% over the previous year. Segment sales were still a little lower than the $6.5 billion in revenue it generated in 2019.
Genuine Parts adjusted diluted EPS increased 31.1% year-over-year to a record high of $6.91 in 2021. This was driven by higher net sales and a 70 point increase year-over-year basis of its non-GAAP net margin at 5.3%. The company’s adjusted EPS growth rate was still a respectable 21.4% compared to 2019.
For a company founded in 1928, this is spectacular growth. And analysts expect high single-digit annual earnings growth over the next two years before falling to mid-single digits. This suggests that OE is a great auto parts stock that looks like it still has a lot of growth in its future.
The dividend is well covered, with significant growth potential
Genuine Parts’ growth forecast looks solid. Combined with a modest dividend payout ratio, it’s easy to see why the stock announced such a generous payout increase for its shareholders.
Genuine Parts’ dividend payout ratio was just 46.8% in 2021. This allows the company to retain the capital needed to repay debt, repurchase stock, and make add-on acquisitions to boost profits.
That’s why I wouldn’t be surprised to see Genuine Parts continue to hand out single-digit annual dividend increases over the next few years. When coupled with its market-beating 2.8% dividend yield, Genuine Parts offers investors a good mix of immediate income and growth prospects.
A wonderful purse at a fair price
The fundamentals of Genuine Parts are solid. But does the valuation seal the deal to make the stock a buy?
Genuine Parts’ forward price-to-earnings ratio of 15.7 is slightly above the specialty retail industry average of 13.8. But based on the quality of the stock, I think it’s a reasonable premium for its industry. And Genuine Parts’ trailing 12-month dividend yield of 2.6% is only slightly below its 13-year median of 2.8%. But that’s somewhat skewed, as the stock was conservative with its 3.2% dividend increase in 2021. Genuine Parts’ fundamentals are also arguably the best they’ve ever been, so it again seems to be a fair valuation to pay for dividend growth investors.
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Kody Kester owns Genuine Parts Company. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.