Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.
Genuine Parts yields 3.4%, a fair bit higher than the S&P’s 1.9%.
2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn’t seem particularly high.
Genuine Parts’ payout ratio is a reasonable 50%.
3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than 5 is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Genuine Parts has a debt-to-equity ratio of 17% and an interest coverage ratio of 31.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Let's examine how Genuine Parts stacks up next to some of its closest peers:
5-Year Earnings-Per-Share Growth
5-Year Dividend-Per-Share Growth
|LKQ (Nasdaq: LKQX )||28%||NM|
|O'Reilly Automotive (Nasdaq: ORLY )||16%||NM|
|AutoZone (NYSE: AZO )||24%||NM|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; these companies don't pay dividends.
Distributor Genuine Parts has managed to grow its earnings over the past five years, though not at the rate of its retail-focused peers.
The Foolish bottom line
Genuine Parts exhibits a reasonable dividend bill of health. It has a moderate yield, a reasonable payout ratio, limited debt, and a bit of earnings growth to boot.