This Dividend King Takes the Checkered Flag (original) (raw)

This week two auto parts companies boosted their quarterly dividends to shareholders -- and there are reasons to think both of their business models will remain strong in the coming months.

For dividend income-seeking investors, however, there is a clear choice in which shares they should be test driving for their portfolio.

The Average Age of U.S Vehicles

With new-vehicle sales dipping as a result of the coronavirus pandemic, the average age of vehicles on the road has risen to 11.9 years, according to data from IHS Markit. That's roughly one month older than it was in 2019, and IHS Markit is forecasting for that average age to tick even higher by four to six months in the coming years.

Given what we know about the consumer and the number of unemployed persons, that forecast is rather logical. Granted, it won't exactly be welcome news for investors in Ford Motor (F) , General Motors (GM) , Fiat Chrysler (FCAU) and other automakers. But it's a positive for auto parts companies that serve the aftermarket needs of repair shops and vehicle owners.

Advance Auto Parts

Advance Auto Parts (AAP) is a leading North American automotive aftermarket parts provider that serves both professional installers and "do-it-yourself" customers as well as independently owned operators. At the end of the September 2020 quarter, the company had 4,811 stores and 168 branches that offer a broad selection of brand name, original equipment manufacturer and private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy-duty trucks.

Roughly 67% of Advance Auto Parts' revenue is derived from parts and batteries, 20% from accessories and chemicals, 12% engine maintenance with the balance falling into the company's other category.

While the connection to the aging U.S. vehicle fleet is obvious, Advance Auto Parts has been paying dividends to shareholders since early 2006. It even did so even during the Great Recession. And not only did the company pay dividends last year during the pandemic, but right before the pandemic took hold in the U.S. Advance Auto upped its quarterly payout -- to the current 0.25pershareperquarterfromitslongstanding0.25 per share per quarter from its longstanding 0.25pershareperquarterfromitslongstanding0.06 per share per quarter. And the company didn't miss a beat.

What that shows is the counter-cyclical nature of the company's business and the effect of aging vehicles on the road.

Genuine Parts Company

Genuine Parts (GPC) is engaged in the distribution of automotive replacement parts, industrial parts, and business products. The company's Automotive Parts distribution centers distribute replacement parts (other than body parts) for substantially all motor vehicle makes and models in service in the U.S. as well as replacement parts for small engines, farm equipment, marine equipment and heavy-duty equipment.

The Industrial Parts Group distributes industrial replacement parts and related supplies such as bearings, mechanical and electrical power transmission products, industrial automation and robotics, hose, hydraulic and pneumatic components, industrial and safety supplies and material handling products to maintenance, repair and operation as well as original equipment manufacturer customers.

Depending on the quarter, 65%-70% of Genuine Part's sales and operating profit are derived from the Automotive business with the balance from the Industrial business.

And the company is a Dividend King, a select group of companies that have raised their dividends for at least 50 consecutive years.

In 2020, Genuine Parts announced its 64th consecutive dividend increase to shareholders, and very recently it announced its 65th consecutive dividend increase, a 3.5% bump to $0.815 per share per quarter. At the current share price investors now have a 3.2% dividend yield to enjoy.

A dividend payout ratio below 70% and a favorable outlook for its largest business likely mean investors will see Genuine Parts drive further down the path of dividend increases. By comparison, the yield on AAP shares pales in comparison at 0.7%, and AAP lacks the long history of dividend hikes like Genuine Parts.

For this round of the auto parts dividend derby, GPC shares are the clear winner.

At the time of publication, Versace had no positions in any securities mentioned.