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Dividend Kings In Focus: W.W. Grainger


Updated on October 5th, 2023 by Aristofanis Papadatos

W.W. Grainger, Inc. (GWW) recently increased its dividend for the 52nd consecutive year. This means Grainger has a position in the exclusive list of Dividend Kings. The Dividend Kings have raised their dividend payouts for at least 50 years.

We believe quality dividend growth stocks like the Dividend Kings are attractive for long-term investors. For this reason, we compiled a full list of all Dividend Kings.

You can download the full list of Dividend Kings, plus important financial metrics such as dividend yields and price-to-earnings ratios, by clicking on the link below:

 

Grainger has maintained its Dividend King status thanks to its superior position in its industry. Its competitive advantages have fueled the company’s long-term growth.

As we see continued growth in the business-to-business distributors of the maintenance, repair, and operations (“MRO”) supplies industry, Grainger should keep growing its dividend for many more years.

In this article, we will discuss the business model of Grainger, its growth catalysts, and its expected returns.

Business Overview

W.W. Grainger, headquartered in Lake Forest, IL, is one of the world’s largest business-to-business supply distributors of maintenance, repair, and operations (“MRO”).

The company was founded in 1927 and generated sales of $15 billion in 2022. Grainger trades with a market capitalization of $35 billion. Grainger is a member of the Dividend Aristocrats Index and the Dividend Kings.

Grainger has more than 4.5 million active customers, with more than 30 million products offered globally.

Source: Investor Presentation

It has also adjusted swiftly to the boom of e-commerce, as more than 75% of its orders in the U.S. are placed via digital channels.

On July 27th 2023, the company reported its second-quarter results. Revenue grew 9% over the prior year’s quarter, primarily thanks to 9.9% sales growth of High-Tech Solutions amid material price hikes and continued volume gains across all geographies.

The Endless Assortment segment also performed well, with its sales growing by 10% on an adjusted basis, driven by new customer acquisition across the segment as well as enterprise customer growth.

Earnings grew 26.5% thanks to strong sales growth and an expansion in gross margin and operating margin by 170 and 190 basis points, respectively. Earnings per share grew 29%, partly assisted by a reduced share count.

Based on strong results so far in 2023 and no signs of fatigue on the horizon, Grainger’s management team raised its full-year guidance for earnings per share from $34.25-$36.75 to $35.00-$36.75.

Growth Prospects

Grainger has grown its earnings per share at an 11.2% average annual compound rate between 2013 and 2022. This result was driven by 5.5% annual revenue growth, an expanding profit margin, and a 3.3% average annual decrease of the share count.

Earnings per share decreased 6% in 2020 due to the pandemic, from $17.29 in 2019 to $16.18. Such a small decrease during a fierce recession is certainly satisfactory and confirms the resilience of the company to downturns. Even better, the company has recovered strongly from the pandemic, with record results in 2021 and 2022. The company is on track for another record in earnings per share this year.

Moreover, Grainger has ample room for future growth. It is the largest player in High-Tech Solutions but has a market share of only 7% in the North American market.

Source: Investor Presentation

Grainger also has plenty of room to grow its Endless Assortment business. The company is expanding its addressable market with new products and new customer segments.

Moreover, the company will deepen customer relationships through service-based offerings, which should help increase same-customer sales and total revenue.

Furthermore, Grainger expects to spend $750-$850 million on share repurchases this year. It is thus likely to reduce its share count by about 2.3% this year. Share repurchases will continue to help drive earnings growth, as the company has reduced its share count by an average rate of 3.3% per year since 2013.

Overall, we expect Grainger to grow its earnings per share by 6.5% per year over the next five years.

Competitive Advantages & Recession Performance

Grainger’s most significant competitive advantage is its strong position as an industry leader in MRO products. We believe that the company has a solid ability to fight off pressures from new (i.e., Amazon) and existing businesses in the MRO market.

This exclusivity is built by solid supplier relationships. As Grainger is the largest MRO industrial distributor in North America, it benefits from volume-based discounts and other sales incentives, which would be unattainable by smaller distributors.

These competitive advantages provide the company with consistent growth, even during economic downturns. Grainger grew earnings during the Great Recession.

Grainger’s earnings-per-share during the recession are as follows:

This growth during the Great Recession speaks volumes about the company’s resilience to economic downturns. As mentioned above, the company performed well during the COVID-19 pandemic, with just a 6% earnings decline in 2020.

Overall, the company sports an A+ credit rating from S&P with a net leverage ratio of 1.0, which is very solid. Thus, Grainger has the balance sheet strength to withstand another recession.

Valuation & Expected Returns

We expect Grainger to earn $35.88 per share this year. As a result, the stock is currently trading at a price-to-earnings ratio of 19.1.

Over the past decade, the shares of Grainger have traded with an average price-to-earnings ratio of 19.4. We are using 18.0 times earnings as a fair value baseline, considering a slightly slower expected growth rate and a rising rate environment.

As a result, we view the stock as slightly overvalued.

If the price-to-earnings ratio declines from 19.4 to 18.0 over the next five years, shareholder returns will be reduced by 1.2% per year.

However, dividends and earnings-per-share growth will boost shareholder returns. Grainger has a current dividend yield of 1.1%. Given also 6.5% annual growth of earnings per share over the next five years, the stock of Grainger is expected to generate an average annual total return of 6.2% over the next five years.

Final Thoughts

Grainger is a solid company with a tremendous earnings and dividend growth history. It has grown its dividend for 52 consecutive years and hence it is a relatively new member of the Dividend King list.

However, the shares are trading somewhat higher than our fair value estimate. As a result, the total return potential comes in at 6.2% per year over the next five years.

Even though the total return proposition does not appear compelling, the resilience of the company, its low dividend payout ratio (21%) and its impressive dividend growth streak are notable. Still, shares earn a hold rating at the current price.

The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors:

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