I get a lot of questions each month from subscribers to my premium income newsletter, High-Yield Investing.
With such a devoted following, I make it a point to read every single message. And every once in a while, I'll come across a question from a subscriber that I think is worth sharing.
Q: Are there any high-quality dividend payers temporarily hurt by the strong U.S. dollar that could be attractive turnaround candidates?
Here was my answer...
Yes, there are some strong turnaround candidates that have taken a hit recently, and I'm tracking a few of them for my portfolio. For some background, the strong dollar has been a thorn in the side of many large multinational companies over the past few quarters.
A stronger greenback not only makes exported goods less competitive overseas, but also erodes the value of sales conducted in foreign markets when revenues denominated in yen, euros and rubles are converted back into dollars.
One such opportunity is Genuine Parts Company (NYSE: GPC).
This specialty retailer is best known for its NAPA auto parts stores, which stock windshield wipers, oil filters and 450,000 other products for cars and trucks. There are 6,000 owned and franchised locations nationwide -- and over 1,000 more in Canada, Australia and New Zealand.
Auto parts account for half of the company's revenues. GPC also rakes in billions each year from two other business lines. The company sells office furniture and supplies to large accounts such as Staples and Office Depot. And it's a top supplier of industrial equipment sold to customers in the food & beverage, lumber, mining, steel, energy and petrochemical fields.
GPC turned in record performance in 2014, with sales rising 9% to $15.3 billion and earnings increasing by 10% to $4.61 per share. But growth has been tougher to come by in 2015. Through the first nine months of the year, revenues have inched up just 1%. But sales were up 4% in local currencies, so the dollar wiped out 75% of the increase. The dollar has also pinched the bottom line by $0.11 per share, reducing earnings to $3.56 from $3.67.
The lackluster results have pressured the shares, which have slid from $107 at the start of the year to less than $90 today.
We can't say that currency fluctuation is the sole reason for the decline, but it has certainly played a role. However, I would argue that the strong dollar will have little impact on the company's long-term earnings potential.
First, this currency headwind won't blow forever. It will eventually subside, possibly turning into a tailwind. Furthermore, changes in the Canadian dollar or Australian dollar say absolutely nothing about GPC's market share, profit margins or other core measures of operating performance.
This stalwart company has increased sales in 63 of the past 65 years. Since 1950, revenues have advanced in every year but two (a stretch that includes more than a few recessions). Along the way, it has also managed to grow profits in 50 of the past 54 years.
With a lofty return on invested capital of 17.1%, GPC generates a copious amount of free cash flow. And management has four top priorities for that cash:
2) Reinvestments in the Business
3) Share Repurchases
You'll notice what gets top billing. And the company puts its money where its mouth is. GPC is a Dividend Aristocrat with a standout track record. The company has raised its dividend distributions for 59 consecutive years. That's more than iconic businesses such as Coca-Cola (52), Wal-Mart (40), and McDonalds (38).
As you can see from the table below, GPC has outperformed all major market averages over the past 1, 3, 5, 7, and 10-year periods.
GPC vs. Market Averages
|Compound average returns through 12/31/14|
Any flash-in-the-pan stock can excite the market and have a good year. But GPC has consistently been near the top of the market's leaderboards for over a decade. That doesn't happen by accident.
Prior to this dollar-induced slump, the company had produced record profits in 2010, and 2011, and 2012, and 2013 and 2014. Over that span, earnings climbed at a healthy 14% pace. In other words, the soft 2015 results are the exception, not the rule.
I think we'll see a return to normal in 2016. All the demand drivers and big-picture growth catalysts that fueled this upward rise are still in place. But shortsighted investors can't look past today. When the company posted third-quarter results on October 19, GPC shares slipped as low as $81.31. That was a 24% drop for the year, versus a mere 1% decline for the S&P.
I don't know how long this hiccup will last. But such pullbacks have been few and far between for this market-crushing cash-generator. The dividend yield is now above 3%, not quite large enough to make the cut for my High-Yield Investing portfolio, yet still 50% higher than the S&P average of 2%. And in March, I think we'll see the dividend distribution move higher for the 60th straight year.
Note From the Editor: While GPC's yield doesn't quite make the cut for my High-Yield Investing newsletter, it's still worthy of consideration for investors looking for a solid turnaround story.
On the other hand, there's a small group of dividend payers I think every single income investor should own. I call them my High-Yield Hall of Fame. These stocks have outlasted wars, depressions, recessions, financial panics and more -- while still raising dividends year after year. To learn more about these elite income stocks, click here.