Published November 4th, 2016 by Bob Ciura
W.W. Grainger (GWW) is a prime example of a company that has mastered distribution and supply chain efficiency. It is a global supplier of maintenance, operating, and repair (otherwise known as MRO) products. W.W. Grainger’s most profitable region is the U.S. and Canada, where the company has more than 700 branches and 34 distribution centers.
Its iron-clad grip on the North America market has fueled W.W. Grainger’s impressive growth over the past several decades. Today, it has grown into a huge company. W.W. Grainger generates $10 billion in annual revenue.
The company has raised its dividend payments for the past 45 years in a row. This makes W.W. Grainger a member of the exclusive Dividend Aristocrats List – businesses with 25+ consecutive years of dividend increases. You can see all 50 Dividend Aristocrats here.
Keep reading this article to learn more about the compelling investment prospects of W.W. Grainger.
W.W. Grainger has 3 million business and institutional customers worldwide. It sells these businesses a wide variety of products, such as safety gloves, ladders, motors, and janitorial supplies. It also provides services such as inventory management.
It is highly diversified in terms of product categories and the industries it services.
Source: 2016 Fact Book, page 1
The company is split into three main operating segments, which are organized by geographic regions:
- U.S. (78% of sales)
- Canada (7% of sales)
- Other Businesses (15% of sales)
The other businesses segment includes the company’s operations in Japan (called MonotaRO), the United Kingdom, and continental Europe.
W.W. Grainger has a large customer portfolio. It provides products and services to customers of all sizes.
Source: 2016 Fact Book, page 2
The long-term growth prospects for W.W. Grainger are quite good. The company is expanding in the international markets are a high rate. But the near-term road could be bumpy.
This year, W.W. Grainger has slowed down a bit. Its earnings-per-share over the first three quarters of the year declined 5% from the same period the previous year.
The company’s results look slightly better when adjusting for one-time expenses like restructuring and inventory reserve adjustments. After excluding these factors, W.W. Grainger’s adjusted earnings-per-share declined a more modest 3%.
These results are discouraging, but not entirely surprising. This year has seen a heightened level of risk in the global economy, due to the Brexit vote and slowing emerging market growth.
Still, the long-term growth opportunities remain intact. Sales increased 3% in the first three quarters of the year. This is a solid performance in a difficult macro-economic climate.
The leading segment for W.W. Grainger so far in 2016 is the Other Businesses geographic region. Sales in that segment rose 44% through the first three quarters, compared with the same period last year.
As a result, continued growth in new markets is W.W. Grainger’s most attractive long-term growth catalyst.
Another compelling growth catalyst is growth from omni-channel development. E-commerce is booming, and W.W. Grainger is investing rapidly in this area to capitalize. For example, its single-channel online businesses include MonotaRO, Zoro, and Cromwell.
MonotaRO, based in Japan, increased revenue by 29% last year. Zoro, based in the U.S., increased revenue by 62% in 2015.
Competitive Advantages & Recession Performance
The first competitive advantage for W.W. Grainger is its size. W.W. Grainger has a $12 billion market cap, which provides the company with scale.
Its considerable financial resources allow the company to maintain a huge distribution network. W.W. Grainger has 330 branches and 19 distribution centers in the U.S. alone.
That keeps profit margins high and gives W.W. Grainger the ability to invest in new growth opportunities. W.W. Grainger generates very high returns on invested capital, thanks largely to its high-margin North America segment.
Source: Source: 2016 Fact Book, page 4
Another competitive advantage is its supply chain efficiency. W.W. Grainger provides next-day ground delivery to more than 95% of its customers in North America.
Of course, W.W. Grainger has its own risks, as all companies do. It has an economically-sensitive business model, and as a result saw its earnings decline during the Great Recession.
For instance, W.W. Grainger’s earnings-per-share declined by 14% in 2009.
- 2007 earnings-per-share of $4.94
- 2008 earnings-per-share of $6.09
- 2009 earnings-per-share of $5.25
- 2010 earnings-per-share of $6.81
The good news is that, thanks to the company’s efficiencies and scale, its earnings-per-share quickly rebounded. In 2010, earnings-per-share hit new record highs. W. W. Grainger has continued to grow earnings-per-share since then, thanks to the steady economic recovery.
Valuation & Expected Total Return
W.W. Grainger stock trades for a price-to-earnings ratio of 18.3. It is cheaper than the S&P 500, which has a price-to-earnings ratio of 24.0.
It seems W.W. Grainger stock is trading for an unwarranted discount. It is a very high-quality company. From 2006-2015, earnings-per-share increased by 11% each year. That is an impressive growth rate, considering that 10-year period included the Great Recession.
As a result, investors can realistically expect ~10% annual earnings growth going forward. One should always err on the side of caution when projecting the future. W.W. Grainger may not be able to deliver quite as rapid of growth over the next several years, but double digit returns are still certainly possible.
Assuming the following factors:
- 8%-11% earnings growth
- 2.4% dividend yield
In this scenario, W.W. Grainger would provide 10.4%-13.4% total returns. Also, note that this assumption does not include the impact of expansion in the price-to-earnings multiple. A higher price-to-earnings ratio would boost W.W. Grainger’s returns even more.
Thanks to its expected earnings growth, its dividend is expected to grow as well. The company has done a great job of providing dividend increases that significantly exceed the rate of inflation. For example, the 2016 dividend raise was 4.3%.
W.W. Grainger has a strong business model, and a long runway of growth ahead of it. Future earnings growth could easily reach double digits. Growth will be fueled by expansion in new areas of the world, particularly through e-commerce.
From an income perspective, the stock offers an above-average dividend yield and consistent dividend growth each year.
For these reasons, W.W. Grainger is a strong candidate for ownership in a dividend growth portfolio. The company ranks very well using The 8 Rules of Dividend Investing thanks to its strong growth rate, conservative 42% payout ratio, reasonable valuation, and stability.