Measuring Dividend Quality With Genuine Parts

We're in a severe and probably prolonged recession, and deflation may or may not last for years, but it's here and doesn't seem to have any further travel plans. Growth of any kind in the U.S. economy overall seems like wishful thinking, for at least the next year or two, and worse for any kind of retail or banking. The replacement auto parts business, though, seems unlikely to get too much worse, even in a severe recession, and it isn't capital-intensive.

Below is a graph for Genuine Parts to illustrate what good asset efficiency looks like.

As you can see, it takes very little in additional assets and capital in order to generate an even higher amount of sales.

If we expect little or no growth, though, what's the point of investing in stocks? Income, of course, is a good reason that most Americans have forgotten in a world of 1% dividend yields for so many years on the S&P 500.

Genuine Parts pays a 4.3% dividend, AutoZone nothing. Both should grow at low- to mid-single-digit rates longer term, so even if you're still focused on growth, a 4.3% dividend lowers the capital gains hurdle for your total return goal considerably. Both have free cash flows that are about the same as reported earnings, so both are equally profitable in terms of real money vs. Wall Street money, but with Genuine Parts, you are less dependent on the good news gods for your profits.

The difference is the dividend. Three-year Treasuries yield 1%. Even in recessions, a reasonably secure dividend of 4.3% in a stock with a stable business and with a widely respected brand name like NAPA would also seem to offer a reasonably reliable income stream. Genuine Parts' dividend is covered 2 times over by free cash flow, so it's hard to imagine what would threaten it.

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At the time of publication, Loest had no personal positions in any stocks mentioned outside his holdings of the Integrity Growth & Income Fund and the Williston Basin/Mid-North America Stock Fund, which he manages.

Robert Loest is a financial analyst charterholder (CFA). He has managed money for institutions and individuals since 1987 and is frequently quoted in the press. He has appeared as a regular or occasional guest on many financial programs, including CNNfn, CNN, CNBC, Fox Financial News, Bloomberg, Wall $treet Week with Louis Rukeyser and two years as a regular panelist on CNBC's ?Market Week with Maria Bartiromo,? broadcast from the floor of the NYSE.

Loest employs a value-based, bottom-up approach to stock selection. He invests in companies that consistently generate high amounts of free cash flow and demonstrate high returns on invested capital. He estimates a fair value based on discounted FCF, and typically purchases stocks only at a discount to estimated fair value. He also employs various risk management tools to minimize the level of risk. His primary objective is to generate high risk-adjusted returns.