What Makes Genuine Parts Company's Stock Worth Owning?

The real-money Inflation-Protected Income Growth portfolio owns shares of Genuine Parts Company (NYSE: GPC  ) . Genuine Parts, like every company in that portfolio, earned its place because at the time it was purchased:

  • Its shares appeared to be reasonably priced.
  • Its balance sheet looked solid.
  • It had a covered dividend with a history of increases.
  • That dividend looked capable of continuing to rise.
  • The company fit reasonably well within the portfolio from a diversification perspective.

Still, just because a company fit a portfolio at one time doesn't mean it will fit forever. This article reviews the current state of several of the key factors that made Genuine Parts worth owning to determine whether it still has what it takes to retain its spot in the IPIG portfolio.

Based on a discounted cash flow analysis, Genuine Parts' business looks to be worth around $13.9 billion. Its stock recently closed at a price that gave the company a market capitalization of $12.7 billion. Since the company's market capitalization is slightly below the IPIG portfolio's fair-value estimate, the IPIG portfolio would consider buying at this price if it didn't already own shares. Still, any fair-value estimate is based on projections of an unknown future, and nobody has the ability to predict it exactly correctly.

Result: Hold, based on valuation.

Balance sheet
Genuine Parts has a solid balance sheet, with a debt-to-equity ratio of around 0.3. That reasonable debt-to-equity ratio gives the company the flexibility to manage through financial turmoil and economic cycles while remaining strong. In addition, the company has more than $300 million in cash on its balance sheet, which positions it well for servicing its existing debt while continuing to reward shareholders.

Result: Hold, based on balance sheet.

Genuine Parts currently pays an annual dividend of $2.15 per share, which it has increased every year for the past 57 years. Dividend growth is an important characteristic that the IPIG portfolio actively seeks, and Genuine Parts has a nice track record of increases.

This track record positions it well ahead of its competition in the auto-parts business. For instance, AutoZone (NYSE: AZO  ) doesn't pay dividends at all, Advance Auto Parts' (NYSE: AAP  ) dividend has been stuck at $0.24 per year since 2006, and Pep Boys (NYSE: PBY  ) reduced its dividend in 2009.

In addition to clearly beating its competition on the dividend front, Genuine Parts' dividend remains well covered, with a 47% payout ratio. That payout ratio means that the company retains about half of its earnings to invest in future growth, while directly rewarding its shareholders with cash for the risks they take by investing.

Result: Hold, based on dividends.

All told: a company still worth owning
Looking at its valuation, its balance sheet, and its dividend, Genuine Parts still maintains the essential qualities needed to retain its place in the Inflation-Protected Income Growth portfolio. That may change over time, though, depending on the company, its competition, regulatory shifts, the whims of the market, and changes in its operating environment that reduce its ability to thrive. As a result, the company will again be reviewed in the future to make sure it still deserves a spot in the portfolio.

Why dividends rule
One of the reasons Genuine Parts was so attractive to the IPIG portfolio is a dirty secret that few finance professionals will openly admit: Dividend stocks as a group frequently handily outperform their non-dividend-paying brethren. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best.

With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

To follow the IPIG portfolio as buy and sell decisions are made, watch Chuck's article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the IPIG portfolio, simply click here.

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Chuck Saletta

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.

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9/1/2015 4:05 PM
GPC $81.20 Down -2.29 -2.74%
Genuine Parts Comp… CAPS Rating: ****
AAP $172.62 Down -2.63 -1.50%
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AZO $714.37 Down -1.62 -0.23%
AutoZone CAPS Rating: ***
PBY $11.71 Down -0.39 -3.22%
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