Genuine Parts: Boring Can Be Beautiful

By Will Ashworth | August 25, 2008 AAA

While researching the iShares Dow Jones Select Dividend Index ETF (NYSE:DVY) I came across a company that practically defines consistency. Genuine Parts Company (NYSE:GPC) has been in business since 1928, and it has has increased revenue every year since its inception with the exception of 1947, 1949 and 2001. In fact, it's been so consistent, it has paid a dividend every year since going public in 1948, and 2008 will be the 52nd consecutive year increasing its dividend. (For more read The Importance Of Dividends and The Power of Dividend Growth.)

Glamorous it Isn't
With 80 years distribution experience, Genuine is in position to meet its customers' needs. The company distributes automotive replacement parts, industrial parts, office products and electrical/electronic materials. Its approximately 32,000 employees operate four divisions: Napa Auto Parts (Automotive), Motion Industries (Industrial), S.P. Richards (Office Products) and EIS (Electrical).

Genuine Parts was originally an automotive parts company. Its diversification process began over 30 years ago; today, Genuine Parts is a $10.8 billion company with operations throughout North America. Napa Auto stores now account for just 49% of revenue, Motion Industries another 31%, SP Richards 16% and EIS the remaining 4%. Times have certainly changed.

Business Is Steady
Sales were up 4% in 2007 to $10.84 billion. Income before taxes was up 6% to $817 million and diluted earnings per share up 8% to $2.98. That was more than enough to pay the $1.46 dividend. While its sales growth in 2007 was below its target of 6%-8%, there were a couple of bright points: Motion Industries sales were up 8% and EIS 7%. Even the automotive division, despite a horrible auto industry, eked out a 2% increase. Only the office products business saw a decline in its numbers, down by 1%. Management believes both the automotive and office products divisions, although struggling, will show improvement in the second half of the year. An 80-year track record says don't bet against the company.

Slow, Consistent Growth
In the past five years, Genuine Parts' sales have grown from $8.5 billion in 2003 to $10.8 billion in 2007, while income before taxes increased $245 million to $817 million in 2007.

Every division has seen gains. The auto parts group sales went from $4.48 billion in 2003 to $5.31 billion in 2007, Motion Industries from $2.25 billion to $3.35 billion in 2007, office products from $1.46 billion to $1.77 billion in 2007 and EIS sales went from $298 million in 2003 to $436 million in 2007. Small gains to be sure. However, slow and steady wins the race.

Its stock has split 10 times in the past 60 years as a public company. One share in 1948 today is worth 205 shares. Its last split was in April 1997. Even more importantly, its dividend in the past 10 years is up 56 cents, or 56%, from $1.00 in 1998 to $1.56 in 2008. I'm impressed, but the market isn't. (Find out more on financial reports in Advanced Financial Statement Analysis.)

Could the Market Be Wrong?
Genuine Parts stock is down about 10% in the past 52-weeks. In the five years up to 2007 fiscal year end, total shareholder return trailed both the S&P 500 and Peer Index. Peer index is made up of various companies which compete with Genuine Parts' segments, and accounts for reinvested dividends. What gives?

Here you have consistency-plus and the market totally disregards the achievement. It doesn't seem to matter that at the end of 2007, debt was $500 million, just 15.5% of total capitalization. In addition, free cash flow was $283 million and that's after repurchasing five million shares, spending $116 million in capital expenditures and returning $243 million in dividends. But this is not enough says Mr. Market.

Even increasing sales in the second quarter by 4% to $2.87 billion and EPS 7% to 81 cents doesn't seem to matter. What about the dividend, it's currently yielding about 3.6%; shouldn't that budge the stock price? Apparently, none of this matters. It seems boring has no place in investing.

Bottom Line
Zacks gives it a 'hold' and a target price of $43. Despite expanding product lines, penetrating new markets and making lots of acquisitions, not to mention diversifying to avoid reliance on one business, the office products and automotive parts are a drag on growth. Until things improve, Zacks won't guide higher.

I tend to disagree. With revenue growth in the 3-5% range for 2008, it compares favorably with both Sara Lee (NYSE:SLE) and Kimberly-Clark (NYSE:KMB), two other consumer goods stocks in the iShares ETF discussed earlier. If you want consistency, Genuine is a good place to start.

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