1 Great Dividend King Drops 23% Buy Now Near Once-in-a-Decade Pricing

Original parts (GPC -1.91%) doubled the total return S&P500 index since the turn of the century. But shares of the automotive and industrial parts leader have fallen 23% since 2022 as inflation has soared and manufacturers have tightened spending.

Has Genuine Parts — the Dividend King with 68 consecutive years of dividend growth — finally lost its way? Or is the stock’s decline due to short-term cyclicality giving investors a long-term opportunity?

That’s why I’m thinking the latter.

GPC: a world leader in automotive and industrial parts production

GPC, which owns 9,900 automotive parts stores and 720 industrial parts distribution centers, operates in North America, Europe and Australasia through two business segments:

• Automotive Group (62% of sales, 50% of operating profit): Powered by the National Automotive Parts Association (NAPA) brand, this automotive aftermarket segment generates 63% of sales in North America. What sets this group apart from its competitors is that 80% of its sales come from professional repair technicians, compared to just 53% for this group. O’Reilly Automotive and much lower for Car Zone. By focusing on the pro side of the automotive community, GPC maintains a sticky sales base from major accounts, government customers, fleet companies and installers. What’s more, GPC draws 25% of its revenue from Europe, a geography that neither O’Reilly nor AutoZone touch.
• Industrial Group (38% of sales, 50% of operating profit): A leading distributor of industrial parts, Motion Industries sells to a wide range of end markets, from hardware, food and mining to automotive, chemicals and logistics. Today, about three-quarters of its sales come from products such as bearings, power transmission, industrial, safety materials, hydraulics, pneumatics and miscellaneous products.

Typically, GPC’s two business segments, automotive and industrial, come together to form a perfect yin and yang operationally, with one group picking up the slack from the other during more cyclical times. But that wasn’t the case last year.

Compounding flat sales growth in the first quarter of 2024, GPC’s automotive and industrial segments struggled to achieve 7% and 12% same-store sales growth compared to last year. While these results seem concerning, the next few quarters could prove brighter for GPC as the Purchasing Manager’s Index (PMI) has begun to improve over the past year.

GPC Revenue Data (YoY Quarterly Growth) by YCharts

Measuring the health of manufacturing — a key part of the broader industrial sector — a PMI below 50 shows that manufacturer activity is shrinking, not expanding. While the PMI is still below 50, it has started to rise, underpinning GPC’s claims that growth in its manufacturing unit should resume in the second half of the year.

Meanwhile, while automotive sales have also seen a decline, the company has continued to expand at full speed in Europe and Australasia, opening 112 and 22 new stores in each region respectively.

Investors should welcome these expansion plans with open arms given GPC’s solid return on invested capital (ROIC) figures over the past decade.

Solid Profitability Drives This Dividend King

With an average ROIC of 14% over the past decade (including negative pandemic-related impacts), GPC has proven to be able to generate above-average profitability relative to its debt and equity. Simply put, as the company grows—whether by building new stores or making additional acquisitions—it does a great job of squeezing profits out of new locations as quickly as possible.

These opportunities are truly exciting, as GPC has spent approximately $270 million annually on acquisitions since 2015. This, coupled with a consistently high return on invested capital (ROIC), demonstrates a long history of successfully integrating new businesses.

Thanks to its long-standing ability to reinvest in its operations, GPC has become the Dividend King. That title is reserved only for S&P 500 stocks that have increased their dividend payments continuously for 50 years or more — and the companies on that list read like a who’s who of blue chips.

Incredibly, despite increasing its dividend for 68 consecutive years, GPC has a payout ratio of 42%. This means that the company only has to allocate 42% of its net income to fund its 2.9% dividend yield.

The company continues to easily finance its dividend payments, but has ample room to increase it further over the coming years, if not decades.

Why buy GPC now?

With an earnings yield of 6.7% (which is essentially the inverse of the company’s price-to-earnings (P/E) ratio, so the higher the ratio, the better), GPC shares are trading close to a valuation that only comes around once in a decade.

GPC Earnings Data by YCharts

This is not only a higher profit rate than traditionally prevailing, but also significantly higher than the S&P 500 average of 4%.

Finally, if we use the inverse discounted cash flow model from GPC, we find that the company only needs to grow by 5% per year to justify its current stock price, assuming a market discount rate of 10% and a terminal rate of 3%. By increasing sales by 7% and 5% over the last five and 10 years, this goal may be quite achievable.

While macroeconomic cycles have finally caught up with the company for a while, GPC should be poised for renewed growth in the coming quarters and is almost certain to continue to raise its dividend in the years to come.