Genuine Parts Company (GPC 1.35%) long ago blew past the Dividend Aristocrats list and now sits high atop the list of Dividend Kings. The Kings are a group of companies that have increased their dividends for an astonishing 50 or more years. Genuine has done it for 66 consecutive years. Here's how, and how it can continue.
Image source: Genuine Parts Company.
King of the court
There have been many ups and downs in the U.S. macro environment over the last 66 years, but Genuine has endured them all. The key to Genuine's success over the decades is its all-weather business model. The company bases its model on the high priority that customers place on their vehicles. Without vehicles, folks can't get to work, pick up groceries, or get kids to soccer practice. They are essential to people's lives, and when they inevitably break down, people need to get them fixed ASAP.
This scenario describes the customers of Genuine's Automotive segment, which commands about two-thirds of its revenue. Genuine's top automotive market is the do-it-for-me crowd, those who rely on their mechanics to get their cars and trucks back on the road. About 80% of Genuine's Automotive segment revenue comes from local shops and major auto care chains like Firestone, Goodyear, and AAA Approved Auto Centers. The other 20% comes from do-it-yourself customers who prefer to buy replacement car parts and fix their vehicles themselves. These sales are made through Genuine's network of retail outlets that operate under the Napa brand.
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Genuine's Industrial segment generates the other third of the company's revenue and sells parts directly to commercial customers like PepsiCo, Caterpillar, and Alcoa. Keeping delivery fleets up and running is a vital priority for industrial customers. Fleet breakdowns create the risk of missed deliveries or lost business.
Whichever category a customer falls into, getting one's car or fleet repaired or maintained is a high priority regardless of macroeconomic conditions. So Genuine can sustainably earn profits and pay shareholders a dividend through the peaks and troughs of the business cycle.
Paying a dividend for as long as Genuine has is one thing, but increasing it each year is a different story. The company has grown its profits and dividends by making disciplined acquisitions. Being one of the largest auto parts suppliers in the U.S., Genuine quickly scales its smaller acquisitions into its expansive customer list.
By carefully repeating the process for decades, Genuine has demonstrated its durability by growing its profits for 77 of its 94 years and rewarded its shareholders with one of the longest strings of dividend increases on the Dividend Kings list.
Can Genuine keep growing its dividend?
The auto parts industry is a fragmented one, meaning there are a lot of small players. It would be tempting to gobble up the competition as fast as possible, but favoring growth over efficient use of capital can be value destructive. Instead, Genuine prioritizes discipline in its acquisition strategy.
For instance, in January of 2022, Genuine closed its buyout of Kaman Distribution Group for $1.3 billion. That appears to be an attractive valuation considering Genuine expects Kaman to add $1 billion of revenue to its industrial segment. Profit from Kaman and cross-selling opportunities should enable the company to continue its dividend-increase streak in 2023. Continued execution of its proven strategy in a fragmented industry should allow for increases well beyond 2023. Dividend and income investors should seriously consider adding Genuine stock to their portfolios. The company may someday press the powers that be to create a list beyond Dividend Kings.
