Updated on February 8th, 2022 by Quinn Mohammed
Every year, we individually review each of the 66 Dividend Aristocrats. The Dividend Aristocrat we’ll be discussing here is W.W. Grainger, Inc. (GWW).
Grainger has increased its dividend for 50 years in a row. It is a Dividend Aristocrat, a group of stocks in the S&P 500 Index, with 25+ consecutive years of dividend increases.
You can see our full list of all 66 Dividend Aristocrats, along with important metrics like dividend yields and P/E ratios, by clicking on the link below:
As a manufacturer of industrial products, Grainger’s financial health is tied closely to the broader economy. The company faced hardships when the coronavirus pandemic had a significant impact on global economic growth, but earnings bounced back strongly in 2021.
The company has a leading position in its core markets, and is investing in new growth initiatives. It has deployed multiple initiatives to continue growing through the difficult environment.
This article will discuss Grainger’s business, growth potential, and valuation.
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 generates annual sales above $13 billion. You can see an overview of Grainger’s business in the image below:
Source: Investor Presentation
Grainger reported its fourth-quarter earnings results on February 3rd, 2022. For the quarter, revenue equaled $3.36 billion, representing a 14% increase compared to Q4 2020. Gains were driven by volume growth in nearly all customer segments and continued growth in the endless assortment businesses. Adjusted net income equaled $283 million or $5.44 per share, a 49% increase over the same prior year quarter.
For the year, Grainger reported sales of $13.0 billion, a 10% increase compared to 2020. Adjusted net income equaled $1.04 billion or $19.84 per share compared to $16.18 in 2020.
Leadership provided 2022 guidance for the company. Sales of $14.1 billion to $14.5 billion are anticipated, leading to an estimation of $23.50 to $25.50 in earnings-per-share.
Grainger successfully grew revenue in the fourth quarter and the full year, an impressive feat on its own given the challenge of the coronavirus pandemic. Earnings-per-share rebounded sharply, and we expect continued revenue and earnings-per-share growth in 2022 and beyond, assuming continued economic growth.
Grainger lays out a number of growth initiatives in the U.S., as a mix between 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.
The company sees multiple avenues to generate future growth, a few of which are detailed in the image below:
Source: Investor Presentation
Grainger will also benefit from the fact that it operates in a large and fragmented market. The company sees the total U.S. business-to-business supply market as a $1.1 trillion market, of which it captures only roughly 7% right now. Grainger sees its addressable U.S. market at roughly $129 billion, with another $209 billion in addressable market opportunity in the international markets.
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.
Along with internal investments, Grainger has ramped up its digital platform heavily in recent years. All of these catalysts are likely to help Grainger grow earnings over the long-term.
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 4% 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 scale of the business allows it to competitively price its products.
Grainger is not active in a high-tech industry, but the services that the company provides are essential for other businesses. This makes Grainger’s business relatively resilient during recessions, providing it with the ability 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.
Grainger continued to generate strong profitability in 2021, despite the coronavirus pandemic weighing on the global economy.
Valuation & Expected Returns
Based on expected earnings-per-share of $24.50 for 2022, and a current share price of ~$478, the stock has a price-to-earnings ratio of 19.5.
While shares have traded hands with an average P/E ratio of 20 during the last decade, we are taking a more conservative view, using 18 times earnings as a fair value baseline. This implies the potential for a -2.0% annual valuation headwind.
Weighing this potential decline in valuation multiple against a 4% earnings growth rate and the 1.4% dividend yield, investors might anticipate a total expected return of 3.8% per year.
W.W. Grainger is a company 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 50 straight years.
After 50 years of consecutive dividend raises, 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 with low potential returns over the intermediate term, making the stock 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: