Successful investing over the long term stems from looking for companies that increase revenue and free cash flow over the long term. The companies should also retain a sufficient amount of cash for reinvestment back into the business.
However, you may ask, what about increasing my personal cash flow? The answer lies in an S&P 500 list of Dividend Aristocrats -- companies that have boosted dividends for at least the last 25 consecutive years. With these companies, investors enjoy a steady stream of dividend raises over the years. Moreover, companies that boost dividends regularly increase your chances for superior total stock market returns over the long term.
Genuine Parts sells automotive and industrial parts under names such as the National Automotive Parts Association, or NAPA, and Motion Industries. The company also sells office products under S.P. Richards Company and electronics under its EIS subsidiary. Fundamentally Genuine Parts performed OK over the past 10 years growing revenue, net income, and free cash flow 55%, 73%, and 93%, respectively.
Looking at Genuine Parts' balance sheet in the most recent quarter, cash and long-term debt-to-equity clocked in at 3% and 15%, respectively. The low amount of long-term debt is a good thing. Interest on debt can choke out profitability and cash flow over the long term. Investors should look for companies with a long-term debt-to-equity ratio of 50% or less.
Over the past 10 years, Genuine Parts' dividends have made a huge difference in its total return. The company clocked in capital gains of 118% during that time. Reinvesting dividends increased the total return a whopping 87%, bringing the total to 205% during that time and beating the S&P 500 total return of 111%.
Investors should judge dividend sustainability based on the percentage of free cash flow paid out in a full year. With that said, investors should look for dividend-to-free cash flow ratios of 50% or less. Last year, Genuine Parts paid out 35% of its free cash flow in dividends. Currently, the company pays its shareholders $2.30 per share per year, translating into an annual yield of 2.7%.
Grainger describes itself as a "broad-line distributor of maintenance, repair, and operating supplies." You can go to this company to find batteries, tools, paint, etc. The company sells its products via salesmen, brochures, catalogs, and websites. Over the past 10 years, Grainger has expanded its revenue, net income, and free cash flow 87%, 178%, and 157%, respectively.
Grainger's cash and long-term debt-to-equity clocked in at 11% and 13%, respectively, in the most recent quarter. Over the past 10 years, Grainger has registered capital gains of 380%. Reinvesting dividends added 87%, bringing the total return to 467% and beating the S&P 500 total of 111%.
Last year Grainger paid out 34% of its free cash flow in dividends. Currently, the company pays its shareholders $4.32 per share per year and yields 1.6% in dividends.
Genuine Parts will most likely be around for a while. Consumers will always need car parts and industries will need parts for their machines. Last year, Genuine Parts acquired the remaining 70% of Exego Group, which was renamed GPC Asia Pacific, an acquisition that subsequently increased its influence in the Asia-Pacific market. Global expansion will be key to this company's future potential.
E-commerce, expanding market share gains with larger customers, and expansion overseas will also drive growth for W.W. Grainger. Both of these companies deserve a long-term spot in your portfolio.