Genuine auto parts
September 4, 2012 7:26PM
Updated: October 6, 2012 1:38PM
D ear Mr. Berko: In March 2009, I bought 400 shares of Genuine Parts Co. at $27 because it paid a 6 percent dividend, and I also figured that more Americans would own their cars longer rather than buy new cars. I almost have a 36-point profit, and I asked my broker whether I should sell the stock and lock in my $25,000, which includes my $15,000 gain. He thinks the market could have a huge sell-off and cause me to lose my profit, which took me more than three years to earn.
He suggested that I diversify for safety and advised me to sell my Genuine Parts and invest the money in a MassMutual annuity that would guarantee me 5 percent and with which I could never lose money, even if the stock market were to crash. Another reason this makes good sense is that I currently get $792 a year in dividends, and according to my broker, I would get $1,250 (5 percent of $25,000) in guaranteed income from the annuity, which is 55 percent more than I get now. That’s a big number, and he’s advising me to act now because he says MassMutual may lower the 5 percent guarantee to 4.5 percent without warning. I am 61 and hope to retire in six years, so that higher income sounds pretty good to me.
Dear DP: Never ask a tire salesman whether your car needs new tires, a house painter whether your home needs painting or a stockbroker whether you should take a profit. I think your broker is so excited with the prospect of selling you an annuity that he got his galligaskins in a twist. But don’t you dare sell Genuine Parts (GPC — $63). This $13 billion-revenue company derives about $6.4 billion retailing more than 400,000 different vehicle replacement products (engines, brakes, transmissions, shocks, hoses, struts, etc.) under the NAPA name via 5,000 locations in the U.S. and Canada and under Auto Todo in Mexico.
The remaining $6.6 billion in revenue derives from its industrial replacement division (disposable supplies, pulleys, belts, electronics, maintenance items, lubricants, tools, bearings, pneumatic filtration and fluid systems, chemicals, etc.) in more than 2,000 locations in the U.S. and Mexico. Though GPC shares may not be a candidate for exciting growth, GPC’s total return potential over the coming decade is enormously appealing when its dividend is factored in to the equation. GPC has been selling replacement thingamajigs, whatchamacallits and gimcracks since 1928 and has done so well that management has increased its dividend every year since 1956.
In fact, during the past 10 years (dividends included), GPC shares posted a total return of 183 percent, vs. 82 percent for the Standard & Poor’s. Certainly, that’s a lot better than the performance of any annuity in the past decade. And considering the rather rich annual 3 percent fees, costs and charges inherent in most annuity contracts, GPC’s future 10-year return is likely to put any annuity return to shame.
In 2013, GPC’s stable business mix is on track to grow revenues by 8 percent, to $14.2 billion; improve share earnings by 10 percent, to $4.45; and raise the dividend by 10 percent, to $2.18. And in the coming 10 years, GPC also should do as well as it has done in the past. Net profit margins and book value continue to grow, and GPC plans to eliminate its long-term debt by 2014. Its cash position and free cash flow are strong, allowing GPC to continue to make small acquisitions and buy back a few million shares annually. GPC is a niche company that has earned success by producing and selling replacement products in the industrial machinery, automobile and even the office supply markets. If it can wear out or if it’s disposable, GPC will sell you a replacement. I believe that this is a genuinely classy company with above-average long-term revenue, earnings and dividend growth. There’s little doubt in my mind that your retirement years will be much more profitable if you keep
GPC rather than sell your shares and invest the proceeds in an annuity.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.