Why Genuine Parts' Stock Is Worth Owning

The next selection for the newly launched Inflation-Protected Income Growth Portfolio is distribution powerhouse Genuine Parts (NYSE: GPC  ) . Perhaps best known for its NAPA Auto Parts chain, Genuine Parts is also in the business of distributing office supplies, electrical equipment, and industrial parts. 

With a history of rising dividends that stretches back for 56 years, the company's shareholder-friendly behavior predates the Bush dividend tax cuts by several decades. That makes it highly unlikely the pattern will be derailed just because those cuts are slated to expire. And with a respectable payout ratio of 49%, it has considerable coverage even if things do go bad.

Why it's worth owning in the iPIG Portfolio
To earn a spot in the portfolio, a company has to pass a series of tests related to its dividends, its balance sheet and valuation, and how it fits from a portfolio diversification perspective.

Dividends:

  • Payment: The company's annual dividend currently sits at $1.98 a share, a yield of nearly 3.2% based on Friday's closing price.
  • Growth history: The company has paid higher dividends every year for over half a century, with the increases generally coming with the first payment of each calendar year.
  • Reason to believe the growth can continue: 2With a payout ratio of 49%, the company retains about half of its income to reinvest for future growth. Additionally, since its cash flow statement indicates that its earnings are very well covered by cold, hard cash, there's little reason to suspect the trend is at any near-term risk from a financial hiccup.

Balance sheet and valuation:

  • Balance sheet: A debt-to-equity ratio of 0.16 indicates that the company does use debt, but hasn't over-leveraged itself to the point where a financial hiccup would derail it.
  • Valuation: By a discounted cash flow analysis, the company looks to be worth around $10.8 billion, making its recent market price of $9.7 billion look reasonable. Of course, there's some risk involved. For instance, if the economy picks up, people may start trading in their old cars rather than repairing them, potentially hurting its NAPA auto parts business.

Diversification fit:
The first few picks included:

...making this auto parts distributor a decent fit.

What are the risks?
Auto parts is something of a countercyclical industry, meaning that it does well when the rest of the economy struggles. In better economies, people may trade in their old cars rather than sink money into repairing them. While the company's other business lines help smooth out that particular risk, it also means that Genuine Parts' management needs to keep more balls juggling simultaneously than its more focused competition.

Speaking of that competition, auto parts retailers AutoZone (NYSE: AZO  ) and Pep Boys (NYSE: PBY  ) recently reported some bad earnings, complete with some always-dreaded same-store sales declines. Those companies may be harbingers of things to come for Genuine Parts. If automakers Ford (NYSE: F  ) and General Motors (NYSE: GM  ) start reporting sustainably stronger sales figures, it might be a sign that the economic cycle has shifted toward the carmakers and away from the parts suppliers.

Still, in spite of that cyclical risk, Genuine Parts looks attractive from a long-term perspective. It has been selected for this portfolio in part because it has successfully ridden through several economic cycles yet has consistently managed to raise its payment to its shareholders.

What comes next?
When the Fool's disclosure policy allows, I plan to buy Genuine Parts stock for the Inflation-Protected Income Growth portfolio, as long as its share price remains below $64. I expect to invest around $1,500 in the selection, giving it a 5% allocation in the portfolio, with 80% of the portfolio still remaining cash. Watch my article feed for details of the next pick, coming soon.

Also, to score the performance of this pick, I've made an outperform CAPScall on the stock at Motley Fool CAPS, putting my All-Star ranking on the line along with the plan to invest cold, hard cash.

More expert advice from The Motley Fool
Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford's stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.


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