Genuine Parts: On a Roll

08/19/2015 8:00 am EST

Focus: STOCKS

Patrick McKeough

Editor, Successful Investor

Our latest featured recommendation is a US auto parts distributor with a remarkable dividend record; and lower gasoline prices should help the company roll on to more dividend hikes, asserts Pat McKeough, editor of TSI Network.

Genuine Parts (GPC) has raised its dividend every year for the past 59 years. Best known for its NAPA outlets, the company has maintained steady growth in a cyclical business through a series of smart acquisitions.

Genuine Parts stands to benefit from lower gas prices, which encourage Americans to drive more and should increase the demand for auto parts.

The firm gets 53% of its sales and 55% of its earnings by selling replacement auto parts; Genuine operates 1,100 outlets and its distribution business serves 4,900 independent stores in North America, Australia, and New Zealand.

The company also distributes industrial parts (31% of sales, 29% of earnings), office products (12%, 11%), and electrical equipment (4%, 5%).

The company has spurred its growth by purchasing other auto parts suppliers. It tends to target firms that enhance its current products or increase its geographic reach.

In 2012, Genuine paid $343 million for Virginia-based Quaker City Motor Parts; GPC also bought Exego Group, which sells auto parts through over 400 stores in Australia and New Zealand.

In 2014, Genuine added seven more firms for a total of $260 million. And it recently agreed to pay an undisclosed sum for Covs Parts, which distributed auto parts in Western Australia.

Expanding by acquisition adds risk, but small purchases like these tend to be easier to integrate, which lowers the odds of a big write-down.

Genuine can easily afford to keep making acquisitions. As of June 30, 2015, its total debt was $850 million—or a low 6% of its market cap—and it held cash of $223.8 million.

That will also let it continue its share buybacks: it spent $145.2 million on repurchases in the first half of 2015.

Genuine Parts has paid dividends since it became a public company in 1948 and has raised its payout annually for the past 59 years. The current annual rate of $2.46 a share yields 2.8%.

The company’s highly cyclical businesses add risk, but its outlook remains bright. For example, low gas prices are prompting US car owners to drive more and that should spur demand for replacement parts, like brakes.

Genuine will likely earn $4.68 a share in 2015 and the stock trades at a reasonable 18.8 times that forecast.

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