1 Magnificent Dividend King down 23% to buy now, at a valuation not seen in a decade

Authentic pieces (GPC -1.91%) more than doubled the total yield of the S&P 500 index since the turn of the century. However, since 2022, shares of the auto and industrial parts leader have fallen 23% as inflation has soared and manufacturers are tightening spending.

So has Genuine Parts, the dividend king with 68 consecutive years of dividend increases, finally lost its way? Or is this share price decline due to a short-term cycle, offering investors a long-term opportunity?

This is why I think the latter hypothesis.

GPC: A world leader in automotive and industrial spare parts

Home to 9,900 automotive parts stores and 720 industrial parts distribution centers, GPC operates in North America, Europe and Australasia through two business segments:

• Automotive Group (62% of sales, 50% of operating income): Powered by its National Automotive Parts Association (NAPA) brand, this automotive aftermarket segment generates 63% of its sales in North America. What differentiates this group from its peers is that 80% of its sales come from professional repair technicians, while that figure is only 53% for O'Reilly Automobile and much lower for AutoZone. By focusing on the professional side of the automotive community, GPC maintains a strong base of sales with major accounts, government customers, fleet companies and installers. Better yet, GPC generates 25% of its revenue in Europe, a geographic region not served by O'Reilly or AutoZone.
• Industrial Group (38% of revenue, 50% of operating profit): A leading distributor of industrial spare parts, Motion Industries sells to a wide range of end markets ranging from equipment, food and mining to automotive, chemicals and logistics. Currently, approximately three-quarters of its sales come from products such as bearings, power transmission, industrial supplies, safety, hydraulics, pneumatics and miscellaneous products.

Typically, GPC's two business segments, automotive and industrial, operate in perfect operational synergy, with one group taking over from the other in more cyclical periods. However, this was not the case last year.

GPC's automotive and industrial segments saw flat overall sales growth in the first quarter of 2024, but struggled to achieve 7% and 12% same-store sales growth over the past year. As worrisome as these results may seem, the coming quarters could prove more promising for GPC, as the Purchasing Managers' Index (PMI) has started to improve over the past year.

GPC Revenue Data (YoY QoQ Growth) by YCharts

In measuring the health of manufacturing, a key segment of the overall industrial sector, a PMI below 50 indicates that manufacturing activity is contracting rather than expanding. While the PMI is still below 50, it has started to pick up, bolstering GPC’s claims that its industrial unit’s growth is set to pick up in the second half of the year.

At the same time, although sales in the automotive division are also lagging, the company is expanding at full speed in Europe and Australasia, opening 112 and 22 new stores in each region respectively.

Investors should welcome these expansion plans with open arms, thanks to GPC's strong return on invested capital (ROIC) figures over the past decade.

Robust profitability propels this dividend king forward

With an average ROIC of 14% over the past decade (which included negative anomalies due to the pandemic), GPC has proven its ability to generate outsized profitability relative to its debt and equity. Simply put, as the company grows—whether by building new stores or making add-on acquisitions—it does a great job of extracting profits from its new locations as soon as possible.

What makes these capabilities really interesting is that GPC has spent approximately $270 million per year on acquisitions since 2015. Combined with its consistently high ROIC, this highlights a long track record of successfully integrating new businesses.

With its longstanding ability to reinvest in its operations, GPC has become a dividend king. That title is reserved only for S&P 500 stocks that have consistently increased their dividend payments for 50 years or more—and the companies on this list read like a who's who of blue-chip companies.

It's incredible to note that despite increasing its dividend for 68 consecutive years, GPC has a payout ratio of 42%. This means that the company only needs 42% of its net income to fund its 2.9% dividend yield.

The group still easily finances its dividend payments and has sufficient room for further increases in the years, if not decades, to come.

Why buy GPC now?

With an earnings yield of 6.7% (which is essentially the inverse of a company's price-to-earnings (P/E) ratio, so the higher the better), GPC is trading near a valuation that is only reached once in a decade.

GPC Earnings Performance Data by YCharts

Not only is this return above its traditional levels, it is also significantly above the S&P 500 average of 4%.

Finally, if we use a reverse discounted cash flow model with GPC, we find that the company only needs 5% annual growth to justify its current share price, assuming a 10% discount rate and a market-matching 3% terminal rate. With sales growth of 7% and 5% over the past five and ten years, this goal could prove quite achievable.

Although macroeconomic cyclicality appears to have finally caught up with the company for a brief moment, GPC should be poised to revive its growth in the coming quarters and seems almost certain to continue increasing its dividend in the years to come.