Updated on January 27th, 2024
The Dividend Aristocrats are an elite group of stocks in the S&P 500 Index, that have increased their dividends for at least 25 consecutive years. Every year, we individually review each of the Dividend Aristocrats.
W.W. Grainger, Inc. (GWW) is a Dividend Aristocrat that has increased its dividend for 52 years in a row.
You can see our full list of all 68 Dividend Aristocrats, along with important metrics like dividend yields and P/E ratios, by clicking on the link below:
Disclaimer: Sure Dividend is not affiliated with S&P Global in any way. S&P Global owns and maintains The Dividend Aristocrats Index. The information in this article and downloadable spreadsheet is based on Sure Dividend’s own review, summary, and analysis of the S&P 500 Dividend Aristocrats ETF (NOBL) and other sources, and is meant to help individual investors better understand this ETF and the index upon which it is based. None of the information in this article or spreadsheet is official data from S&P Global. Consult S&P Global for official information.
Grainger’s financial health is closely tied to the broader economy as a manufacturer of industrial products. The company has a leading position in its core markets. And, it has deployed multiple initiatives to continue growing earnings in the future.
This article will discuss Grainger’s business, growth potential, and valuation.
Business Overview
Grainger was founded in 1927. Today, it is a large supplier of maintenance, operating, and repair products, or “MRO” for short. These are products like safety gloves, power tools, ladders, test instruments, and motors. It also offers services such as inventory management. Sales span a wide range of both customers and categories without a reliance on any one industry in particular.
The company generated sales in excess of $16 billion last year.
On February 2nd, 2024, W.W. Grainger reported its Q4 and full-year results for the period ending December 31st, 2023. Revenues came in at $4.0 billion, up 5.1% on a reported basis and up 5.5% on a daily, constant currency basis (adjusted) compared to last year. Results were driven by solid performance across the board.
Source: Investor Presentation
The High-Touch Solutions segment achieved sales growth of 4.7% due to solid volume growth in all geographies. In the Endless Assortment segment, sales were up 6.0%. Growth was driven by B2B customers across the segment as well as enterprise customer growth, partially offset by declining sales to non-core, consumer-like customers.
Net income equaled $395 million, a 14.5% increase on an adjusted basis compared to Q4-2022. Net income was boosted by an 80 basis point expansion in the operating margin. This was driven by strong SG&A leverage aided by the absence of one-time costs in the prior year, which was partially offset by a decline in gross profit margin.
A lower share count further boosted the per-share result amid Grainger’s stock buybacks.
Adjusted earnings-per-share came in at $8.33, 16.7% higher year-over-year. For the year, adjusted EPS came in at $36.23 and $36.67 on a GAAP and adjusted basis, respectively.
Growth Prospects
Grainger lays out a number of growth initiatives in the U.S., as a mix between “foundational” and “incremental” initiatives. In other words, between what the company is already doing to keep market share and what it can do to make further gains.
For fiscal 2024, the company now expects to post $17.2 billion to $17.7 billion in sales. They also expect GAAP earningsper-share to land between $38.00 and $40.50.
Source: Investor Presentation
The company sees multiple avenues to generate future growth, the most important of which is that Granger operates in a highly fragmented market.
Therefore, the company sees a large and untapped market opportunity to fuel its long-term growth. Another growth catalyst for Grainger is e-commerce. It has various e-commerce platforms, including MonotaRO in Japan, and Zoro in the United States.
Grainger’s strategic shift of lowering its pricing, thereby creating higher demand, and growing its revenues, seems to have worked well.
EPS growth will be driven not only by rising revenue but also by a reduction in the company’s share count. The company plans to repurchase about $0.9 to $1.1 billion of its stock during 2024, or roughly 2% of its outstanding shares at its current market cap.
Grainger’s revenue is growing, margins are improving over time and share repurchases will continue to boost earnings-per-share growth over the long term. We are forecasting 8% earnings-per-share growth over the next five years.
Competitive Advantages & Recession Performance
Grainger’s competitive advantage is its vast distribution network. It has the ability to offer services such as next-day ground delivery, which help it retain its competitive position. In addition, the business’s scale allows it to price its products competitively.
Grainger is not active in a high-tech industry, but the company’s services are essential for other businesses. This makes Grainger’s business relatively resilient during recessions, allowing it to continue raising its dividend each year.
These competitive advantages helped Grainger stay highly profitable during the Great Recession.
Earnings-per-share during the economic downturn are as follows:
- 2007 earnings-per-share of $4.94
- 2008 earnings-per-share of $6.09 (23% increase)
- 2009 earnings-per-share of $5.25 (-14% decline)
- 2010 earnings-per-share of $6.81 (30% increase)
Grainger only had one year of earnings decline during the Great Recession, in-between two very strong years. Moreover, the company continued to grow after 2010. This indicates a high-quality business model that can withstand recessions relatively well.
Valuation & Expected Returns
Based on the expected earnings-per-share of $40 for 2023 and a current share price of ~$968, the stock has a price-to-earnings ratio of 24.2.
While shares have traded hands with an average P/E ratio of 19 during the last decade, we are taking a more aggressive view, using 21 times earnings as a fair value baseline. Still, GWW appears to be overvalued, implying the potential for a 2.8% annual reduction to shareholder returns.
Weighing this potential decline in valuation multiple against estimated EPS growth of 8% earnings growth rate and the 0.8% dividend yield, investors could anticipate a total expected return of 6% per year for the next five years.
Final Thoughts
W.W. Grainger is a Dividend Aristocrat managed for the long term. It has encountered difficulties at times, but the business continues to persevere, just as it has done for decades. Moreover, the company remains profitable in good times or bad and has an exceptional record of not only paying but also increasing its dividend for 52 years.
As a result, Grainger has joined the even more exclusive list of Dividend Kings.
While the business strength and potential growth are enviable, the dividend yield and the valuation are not particularly compelling at this time. As such, we view Grainger as a solid business, but the stock is a hold and not a buy right now.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Dividend Champions: Dividend stocks with 25+ years of dividend increases, including those that may not qualify as Dividend Aristocrats.
- The Dividend Achievers: dividend stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings: considered to be the ultimate dividend growth stocks, the Dividend Kings list is comprised of stocks with 50+ years of consecutive dividend increases
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
- The Complete List of Monthly Dividend Stocks: stocks that pay dividends each month, for 12 payments over the year.
- The Blue Chip Stocks List: this database contains stocks that qualify as either Dividend Achievers, Dividend Aristocrats, or Dividend Kings.