Pullbacks in the stock market present some great opportunities in the stock market. Thanks Captain Obvious. When I see the whole market stumble substantially for a series of days, I begin looking to purchase stocks that typically trade at a premium that may now become discounted. To me, that’s how you get the most bang for your buck in this kind of market environment. While I was very close to following Lanny’s lead and purchasing JNJ, one of my favorite dividend stocks, there is still one stock I wanted to analyze to see if it would be a better fit for my portfolio. So now, it is time to dive in and perform a stock analysis of Genuine Parts Company.
About Genuine Parts Company
According to Morningstar.com, Genuine Parts Company (GPC) is “a service organization engaged in the distribution of automotive replacement parts, industrial replacement parts, office products and electrical & electronic materials.” As I dove further into the company’s investor relations page, a familiar store popped up…NAPA autoparts. What makes GPC unique to competitors such as Advanced Auto Parts, PepBoys, and O’Reilly Automotive is the diverse product offerings outside of just the secondary automotive parts industry. While the automotive makes up a large chunk of the companies operating footprint (close to 50%), GPC also is a major player in the industrial parts replacement industry, office products industry, and electrical industry. Considering the auto industry is cyclical, having diverse operations among other industries is a big plus for me. However, the diversity also makes comparing GPC to peers difficult since some of the other companies mentioned earlier do not share the same diversification. So for the purposes of this stock analysis, I will forgo comparing GPC to peers since a comparison of metrics would not be apples to apples.
In terms of performance, it has been a rough year for GPC. Currently, GPC is down over 3% MTD and 13% YTD. Based on the latest earnings release, sales and net income increased compared to last year, although the CEO did mention that the growth rates have slowed down compared to prior periods. As a potential investor, the great news (especially considering the company’s poor YTD performance) was that the recent earnings release did not contain any negative comments, such as a downward revision in earnings estimates, potential impairments, or discussions regarding the under-performance of one of GPC’s units. So while the stock price has declined, the company is still growing and expecting moderate growth throughout the rest of the year.
Genuine Parts Company Stock Analysis
Now it is time to dive into the fun part…the metrics! As I mentioned earlier, GPC does not have a direct comparable company so for the purposes of this section I will not compare GPC’s current metrics, valuations, etc., to any other companies. Just GPC vs. Mr. Market! Let’s throw GPC through the Dividend Diplomats’ Dividend Stock Screener and a few of the extra metrics we have developed along the way.
- P/E Ratio Less than the Market- GPC has a current PE Ratio of 19.58 and a forward PE Ratio of 19.04, using TheStreet.Com’s estimated FY ’15 earnings of $4.77. GPC’s current payout ratio is slgihtly lower than the market’s current ratio of 20.47, a positive in our books.
- Payout Ratio Less Than 60%- Once again, another positing for GPC as the company’s current and forward payout ratios are 50.10% and 51.1%, respectively. There is still plenty of room for management to continue to grow their dividend.
- Increasing Dividends– Hands down, this is my favorite metric to assess because investing in company’s that grow their dividend income stream is such a critical piece of the puzzle for a dividend growth investor. If you want more proof, ask Lanny, as he wrote a great article on why it is important to measure your portfolio’s weighted average dividend growth rate. That article caused me to focus in on this metric a lot more closely. First, to start, has GPC increased their dividend for an extended period of time? My answer to that…you don’t earn the title of Dividend Aristocrat without a long period of dividend increases. In February, GPC announced its 59th consecutive annual dividend increase! So yeah, GPC blows this metric out of the water. Second, how have the dividend increases been recently? GPC’s 3 and 5 year dividend growth rates are 7.99% and 8.01%, respectively, which are very solid increases. In total, the yield + annual dividend growth rate is greater than 10%. Boom, GPC passes this metric with flying colors.
- 5-Year Average Dividend Yield– Another metric that can help identify if the stock is undervalued or if a dividend increase is coming around the corner. For greater detail about this tool, see our article from last year. Essentially, if the current yield is above the average, it could potentially signal the stock is undervalued and is primed to appreciate. GPC’s current dividend yield is 2.71% is lower than the company’s 5-year average dividend yield of 2.99%. However, upon further review of the company’s dividend history, GPC’s dividend yield has been much lower over the last three-ish years, so because of this, I figured comparing the average 3-year and 1-year yield would be more representative. GPC’s 3-year average yield is 2.74% and the company’s current 1-year average yield is 2.54%. So what did this analysis show me? That GPC’s dividend yield is lower than it was 4-5 years ago and it is right on par with the company’s recent dividend history. Not really a positive or negative for the purposes of this stock analysis.
- Share Buyback Programs– We love seeing companies buyback shares because it is another tool that can provide a huge reward for dividend investors. Over the last year (comparing shares outstanding per the March 31 10-Qs), GPC has reduced its total outstanding shares .91% from $153.6m in 2014 to $152.2m in 2015. Nothing too material here. The declining share count helped increase EPS ~$.01 in the current year (Compared 3/31/15 NI dividend by each annual share total to arrive at the $.01/share difference). In total, this $.01/share helped increase the payout ratio by less than 1%. As I said before, the impact is immaterial and I will consider this a wash for the purposes of our stock analysis.
- Does adding GPC improve my portfolio’s average dividend yield or growth rate? This is the final metric for my analysis. As I reviewed my portfolio’s performance at the end of last year, I told myself that all future investments would have to improve one (or ideally both) of the following: my portfolio’s average dividend yield and/or my portfolio’s weighted average dividend rate. At the time of this article, my portfolio’s average dividend yield is 3.71% and my portfolio’s weighted average dividend growth rate is 7.54%. So GPC’s current dividend yield of 2.71% would reduce my portfolio’s yield while the average dividend growth rate of ~8% would improve my portfolio’s average increase. Since one of the two metrics will improve, I will count this as a positive!
So after this analysis, where do I stand? The answer, I would not be opposed to adding Genuine Parts Company to my portfolio. GPC performed very well in our stock analysis, defeating the three original metrics of our stock screener, and showed the company would improve one of the two critical metrics of my portfolio. In addition, GPC would represent a new industry in my portfolio, which is always a bonus. However, the analysis did not persuade me enough to place GPC ahead of stocks such as JNJ, IBM, NSC, and ADM, all of which were on our most recent watch list. So I will continue to monitor GPC going forward and if the stock continues to fall, I would gladly initiate a position in the company.
What are your thoughts about the analysis? Would you invest in GPC based on the results of the screener? Or are you watching other stocks right now? I am looking forward to your comments and feedback!
DISCLOSURE: I DO NOT RECOMMEND ANY DECISION TO THE READER OR ANY USER, PLEASE CONSULT YOUR OWN RESEARCH. THIS IS ACTUAL DATA, ANALYSIS, HOWEVER I BASE NO INVESTOR RECOMMENDATION. THANK YOU FOR YOUR UNDERSTANDING.