A Genuine Dividend Opportunity

04/04/2011 10:03 am EST

Focus: STOCKS

Josh Peters

Editor, Morningstar DividendInvestor

Genuine Parts delivers a solid portfolio fix with a 3.4% dividend that’s likely to grow. But wait for a sale before stocking up, write Josh Peters and Richard Hilgert of Morningstar DividendInvestor.

Genuine Parts’ (GPC) largest segment distributes auto parts primarily to independent repair shops through its highly regarded NAPA brand. These customers require a wide range of products to be delivered in a timely manner and rely on NAPA’s services to help move cars in and out of shops quickly.

An immense store and distribution network, large delivery fleet, and in-store inventory monitoring systems create competitive advantages to partially offset pressure from do-it-yourself retailers such as AutoZone (AZO).

Similar knacks for managing wide-ranging inventories and delivering cost-effective products in a hurry characterize Genuine Parts’ other three segments: Motion Industries (industrial parts), S.P. Richards (office supplies), and EIS (electronic components).

Motion Industries’ manufacturing customers need fast deliveries to minimize production downtime, and while sales tend to track overall industrial production, the segment boasts the broadest national distribution network and a leading market share.

Conversely, while S.P. Richards typically generates the highest margins of any segment, it has been challenged by large office-supply retailers that exert pressure on margins and have been taking share from the smaller, independent retailers that the segment also serves.

Despite the challenges of shifting industry trends at retail, we expect overall demand for intermediary services to remain strong. As a market leader with excess financial resources, Genuine Parts is likely to continue pursuing acquisitions of smaller competitors that are unable to compete on a national level.

Genuine Parts’ devotion to dividends is reflected in part in a very conservative balance sheet. At year-end 2010, the company’s cash balance was slightly higher than its $500 million of debt—the latter already being a very low 15% of total capital in light of the stability of Genuine Parts’ cash flow.

The recently raised dividend rate of $1.80 looks to consume about 54% of our 2011 per-share earnings outlook, which leaves more than enough room for any likely threat to profitability posed by cyclical challenges down the road.

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With 55 consecutive years of dividend growth in the books, we have no doubt regarding management’s determination to perpetuate this extraordinary record, and we expect that long-term dividend growth is poised to accelerate somewhat from the 4.7% pace of the past decade.

Overall, we forecast revenue growth averaging 6% over the course of our five-year outlook, a modest continuing rebound in operating margins, and a resumption of share repurchases. These factors support a dividend growth rate that should run at 6%-7% a year, and possibly better, over the long run.

At a recent $52, we think Genuine Parts is fairly valued—capable of providing total returns averaging about 10% a year through a combination of a current yield of 3.4% plus 6%-7% dividend growth. [Shares closed just above $54 Friday—Editor.]

At our Dividend Buy price of $41, the stock would yield 4.4%—nicely above its 3.5% average current yield since 1995—and could contribute solid, low-double-digit total returns to a dividend investor’s portfolio.

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