Last month, the automotive and industrial replacement parts stock Genuine Parts (GPC 0.78%) announced that it would be sending much more cash to shareholders.

Genuine Parts raised its quarterly dividend per share by 9.8% to $0.895. This extended its dividend growth streak to a tie for second place among the Dividend Kings of 66 years straight.

Let's dig into whether a dividend growth investor should buy Genuine Parts' stock by examining its fundamentals and valuation.

A person shops at an automotive store.

Image source: Getty Images.

Jaw-dropping earnings growth for a near-century-old company

Genuine Parts reported impressive earnings results for the year ended Dec. 31 last month. The company delivered a solid rebound in its net sales over the pre-pandemic year of 2019 and record-high non-GAAP (adjusted) diluted earnings per share (EPS). 

Genuine Parts recorded $18.9 billion in net sales during 2021, which represents a 14.1% growth rate over the year-ago period. Perhaps more appropriately, Genuine Parts' net sales were just 2.7% below the $19.4 billion that was generated in the pre-pandemic year of 2019. 

But this doesn't give the full picture because Genuine Parts completed the sale of its business products operation known as S.P. Richards in June 2020. Factoring that revenue out of the results for 2019, Genuine Parts' current operations posted a 7.7% growth rate over 2019.

So what led the company's net sales to bounce back in 2021?

Lagging semiconductor chip fabrication capacity prior to the COVID-19 pandemic and a surge in demand for semiconductor chips resulted in a chip shortage in 2021. For context, the average semiconductor chip inventory was down from 40 days in 2019 to less than five days at its worst point last year. This forced automobile manufacturers to cut their production by as much as 7.7 million cars in 2021.

The drastically higher demand for used car replacement parts were a boost to Genuine Parts' NAPA and Alliance Automotive Group brands. This allowed the company's automotive segment revenue to surge to $12.5 billion in 2021, which was 15.5% higher compared to the year-ago period. This was also 14.2% more than the segment's net sales in 2019. 

And the recovery in demand for industrial replacement parts helped Genuine Parts' Motion Industries brand. This explains how the industrial segment produced $6.3 billion in revenue in 2021, which was an 11.4% growth rate against the prior year. The segment's sales were still a bit below the $6.5 billion in revenue generated in 2019. 

Genuine Parts' adjusted diluted EPS surged 31.1% higher year over year to a record $6.91 in 2021. This was thanks to the higher net sales base and a 70-basis point year-over-year expansion in its non-GAAP net margin to 5.3%. The company's adjusted EPS growth rate was still a respectable 21.4% over 2019. 

For a company that was founded in 1928, this is spectacular growth. And analysts are expecting high-single-digit annual earnings growth over the next couple of years before dropping to the mid-single-digits. This suggests that Genuine Parts is a great auto parts stock that appears to have plenty of growth left in its future. 

The dividend is well-covered, with significant growth potential

Genuine Parts' growth forecast looks strong. Combined with a modest dividend payout ratio, it's easy to understand why the stock announced such a generous payout raise for its shareholders.

Genuine Parts' dividend payout ratio was just 46.8% in 2021. This enables the company to retain the capital necessary to repay debt, repurchase shares, and execute bolt-on acquisitions to drive earnings higher.

That's why I wouldn't be surprised to see Genuine Parts continue to hand out high-single-digit annual dividend increases over the next several years. When paired with its market-beating 2.8% dividend yield, Genuine Parts offers investors a nice mix of immediate income and growth prospects

A wonderful stock trading at a fair price

Genuine Parts' fundamentals are strong. But does the valuation seal the deal to make the stock a buy?

Genuine Parts' forward price-to-earnings ratio of 15.7 is moderately higher than the specialty retail industry average of 13.8. But based on the stock's quality, I believe this is a reasonable premium to its industry. And Genuine Parts' trailing-12-month dividend yield of 2.6% is only a tad below its 13-year median of 2.8%. But this is somewhat skewed, since the stock was conservative with its 3.2% dividend raise in 2021. Genuine Parts' fundamentals are also arguably the best they've ever been, so this again seems like a fair valuation to pay for dividend growth investors.