During a market downturn like the one we've been in throughout most of this year, it can be difficult for investors to keep their composure. With the S&P 500 index down 19% so far in 2022, what can an investor do to remain calm amid market turmoil?
I can't speak for others, but I have found reassurance during this market downturn by turning to the consistency of high-quality dividend growth stocks. One of these stocks, Genuine Parts (GPC -0.45%), has managed to operate consistently enough to boost its annual dividend for 66 consecutive years. This comfortably meets the requirement (along with being an S&P 500 stock) to carry the title of Dividend King. As investors flock to stocks that are viewed as safe picks, Genuine Parts benefits even more (the stock price is up 28% year to date).
Even with this impressive outperformance, the stock still appears to be a buy for dividend growth investors. Let's take a peek under Genuine Parts' hood to find out why.
The industry environment remains favorable
Since its founding in 1928, Genuine Parts grew to become one of the largest automotive and industrial replacement parts companies in the world. It now operates more than 9,000 NAPA and Alliance Automotive Group locations across North America, Europe, and Australasia. The company specializes in offering a huge variety of parts as well as a knowledgeable staff and great service. In North America, Genuine Parts sells more than 650,000 unique parts to customers under the NAPA brand name. The consistency of parts and service built quite a bit of brand loyalty among its customers.
Genuine Parts reported a record $5.7 billion in sales in its third quarter, 17.8% higher than in the year-ago period. Genuine Parts' comparable-store sales surged 12.7% higher year over year for the quarter. The large-cap company's strong sales growth is attributed, in part, to semiconductor chip shortages slowing new car production over the last couple of years. With fewer new cars available, consumers have had to either keep their existing cars on the road or buy a new used car. Given that the average age of cars and light trucks in the U.S. rose to an all-time high of 12.2 years recently, customers rely on auto replacement parts more than ever.
The sales grow can also be attributed to the company expanding its reach through bolt-on acquisitions in its largest segment, automotive parts, and the acquisition of industrial parts distributor, Kaman Distribution Group. As for headwinds, the company's extensive international presence and a strong U.S. dollar created a foreign currency translation headwind of 4%.
The company posted $2.23 in non-GAAP (adjusted) diluted earnings per share (EPS) for the quarter, which was up 18.6% from the year-ago period. Since Genuine Parts' cost of goods sold grew at a higher clip (18.9%) than sales during the quarter, this caused a 2-basis-point decline in non-GAAP net margin to 5.6%. This was more than offset by a 1% decline in the company's outstanding share count from share repurchases to 142.1 million in the quarter.
Thanks to the promising growth prospects of its industry and Genuine Parts' leadership, analysts anticipate 4.6% annual adjusted diluted EPS growth for the next five years. And if anything, that could prove to be a conservative estimate. After all, the aging vehicle fleet in the U.S. isn't something that will be fixed overnight.
Image source: Getty Images.
A well-covered dividend
Genuine Parts' 2% dividend yield is moderately above the S&P 500 index's 1.7% yield. And this market-topping payout is poised to continue growing in the years ahead.
The stock's dividend payout ratio will be just under 43% in 2022. That's more than enough capital to complete bolt-on acquisitions, reduce debt, and repurchase shares while also growing the dividend. This is why I believe that the dividend will be able to grow at a faster clip than earnings over the next few years.
Utmost quality at a reasonable valuation
Genuine Parts is a well-established business putting up double-digit sales and earnings growth. Still, the valuation seems to be rational.
Its forward price-to-earnings (P/E) ratio of 21.9 is a touch lower than the S&P 500 consumer discretionary sector forward P/E ratio of 22.3. This is attractive enough to arguably make the stock a buy-and-hold candidate for dividend growth investors.
