Why This Dividend Stock’s 1,170% Above Average Yield Is A Great Buy!
There are several dividend stocks within our portfolios that are not core positions and I’m thinking about consolidating into existing positions and perhaps a new one.
The “new one” that I’ve had my eye on is Advance Auto Parts (AAP).
Advance auto parts provides automotive replacement parts and accessories while operating under the Advance Auto Parts, Autopart International, and Carquest brands.
As of January 2022, they operated 4,706 stores and 266 branches in the United States, Puerto Rico, the U.S. Virgin Islands, and Canada; as well as 1,317 independently owned Carquest branded stores in Mexico, Grand Cayman, the Bahamas, Turks and Caicos, and the British Virgin Islands.
The company was founded in 1929 and is based in Raleigh, North Carolina.
As auto manufacturers are in a traditionally low margin, high competition industry, betting on the suppliers can be a fantastic idea.
I’m reminded of the pick and shovel companies that sprung up around the California gold rush of the mid 1800’s to sell to prospectors.
While not as lucrative, I think it’s far less risky to bet on the supplier instead of the individual gold miners hoping to strike it rich.
So why am I interested in Advance Auto Parts now?
After a few huge dividend increases, their current dividend yield of 2.92% is a towering 1,170% above their 5 year average of 0.23%!
They have a phenomenal 5 year Compound Annual Growth Rate (CAGR) of 68% and have been paying dividends for 15 uninterrupted years.
During the last recession of 2007-2009 their sales grew 3.9% while their stock price gained 4% while the S&P 500 over that same period was down -55%.
That gives me the warm and fuzzy feeling they should be able to repeat those numbers during the next recession and may become a recession safe haven.
Looking at their free cash flow payout ratio of only 25%, they EASILY have enough cash lying around to pay the dividend and invest back into the business.
Since 2016 their free cash flow per share is up +256%, sales have grown +550%, shares outstanding have decreased -12.72% and total sales have grown +15%.
Do be aware though that they have a net debt to capital ratio of 0.51, which means that Advance Auto Parts is funding 51% of their operations with debt, instead of capital.
In my opinion, this can be risky if the company is barely able to pay the interest on the debt.
A great metric to test this is to look at the Interest Coverage Ratio. This simply tells us how many dollars of operating income there are to cover every one dollar of interest expense.
This is important as if there is a downshift in the economy, sector or company, or if interest rates rise, will they have enough of a cushion to absorb this and keep paying the interest on the debt.
This is important because if the economy or sector hits a rough patch and earnings fall, or if interest rates rise will they be able to still pay the interest on their debt.
Advance Auto Parts has a current ICR ratio of 23.9, which means they currently have $23.90 of operating income to easily cover every $1.00 of interest expense.
Again, this gives me the warm and fuzzy on AAP, not to mention that simplysafedividends.com gives them a dividend safety rating of 89 – VERY SAFE.
This was a very basic overview of Advance Auto Parts and why I feel that they are a great bet for a long term buy and hold dividend growth stock.
In my opinion, while the shift to EV’s may be under way, they will still require replacement parts and companies like Advance will be there to supply automobile owners with the accessories they need.
What do you think about Advance Auto Parts (AAP)?
Let us know and NEVER stop investing in yourself!
Dave |March 25, 20229:36 pm
Well if they are fine with selling wiper blades and washer fluid they may be a good bet. I think EVs will really hurt this industry
Russ |March 25, 202211:04 pm
Fair point and I think they’ll adapt… but time will ultimately tell…. Thanks for the comment, Dave!