What happened
Shares of auto and industrial parts supplier Genuine Parts (GPC 1.46%) advanced a solid 10% in September, according to data provided by S&P Global Market Intelligence. That was below peer Advanced Auto Parts, which was up nearly 20%, but much better than AutoZone and O'Reilly Automotive, which were down 1% and up 3%, respectively. There was no particular news that drove Genuine Parts' advance, per se, but the company did complete an important transaction on the last day of the month.
Image source: Getty Images.
So what
Genuine Parts' two main business lines, auto parts and industrial parts, are largely fragmented industries. As such, the company has frequently used small, bolt-on acquisitions to drive its long-term growth. The last two years have been pretty active on that front, with the notable move in 2019 to buy the final 65% of an Aussie industrial parts company in which Genuine Parts first invested in 2017. This particular purchase, larger than most, is meant to be a platform for growth in the region.
That said, all acquisitions require money in some way, shape, or form. The company has never particularly had a problem coming up with capital. However, its current debt-to-equity ratio of roughly 1 time is higher than it has been historically. So the balance sheet is an increasingly important issue for investors to watch at Genuine Parts. That's doubly true given that its industrial parts business would likely see a headwind from a recession, a risk that appears increasingly worrisome as global growth is slowing.
Which is why the end of September was an important time for Genuine Parts. It announced on Oct. 1 that it had completed the previously announced sale of its electrical parts business (a relatively small operation compared to its auto and industrial parts segments) on Sept. 30. The August release announcing that sale provided this important information about how the proceeds, which were received in late September, would be used: "The use of these funds may include potential investments for both organic and acquisitive growth, reinvestments in the business, share repurchases and the repayment of debt." In other words, in September, investors appear to have been anticipating Genuine Parts getting a bit of cash that it could use to keep leverage in check while it also continues to expand its business.
Now what
Although Genuine Parts saw a notable price advance in September, it isn't exactly known to be an exciting company. It is a slow and steady performer that has long focused on returning value to shareholders via a steadily rising dividend. To highlight this point, Genuine Parts has more than six decades of annual dividend increases under its belt. Dividend-focused investors might find the 3.2% yield today enticing relative to the broader market, but it isn't really that exciting looking at the company's historical dividend yield.
With that in mind, investors should probably take a wait-and-see approach right now, since recent acquisitions have left leverage elevated compared to historical levels. Unless the price drops notably (increasing the yield to more attractive levels, historically speaking), operating successfully with higher leverage for a couple of years or, better, reducing leverage would both be reasons to reconsider Genuine Parts.
