Updated on October 12th, 2022 by Quinn Mohammed
W.W. Grainger, Inc. (GWW) recently increased its dividend for the 51st 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. You can see all 45 Dividend Kings here.
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 45 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:
GWW has maintained its long history of dividend increases 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, GWW should keep increasing its dividend each year.
This article will discuss GWW’s business model, growth catalysts, and 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 $13 billion in 2021. Grainger trades with a market capitalization of $26 billion.
Grainger is a member of the Dividend Aristocrats Index and the Dividend Kings.
GWW has more than 4.5 million active customers, with more than 30 million products offered globally.
Source: Investor Presentation
On July 29th, 2022, the company reported its second-quarter results. Quarterly revenue equaled $3.8 billion, a 19.6% increase compared to Q2 2021.
As a result of solid price realization and strong volume growth, the High-Touch Solutions segment saw sales growth of 22.2%.
Operating earnings were up 60% year-over-year to $534 million for the quarter. Operating earnings growth was propelled by an increase in an operating margin of 13.9%, up 350 basis points from a year ago.
Net income equaled $371 million or $7.19 per share for the second quarter compared to $225 million or $4.27 per share in the same year-ago period.
Based on strong results so far in 2022, Grainger’s management team has increased full-year guidance. Grainger is now expected to earn between $27.25 to $28.75, up from $25.00 to $27.00.
Growth Prospects
Grainger has grown its earnings-per-share at an 8.5% average annual compound rate between 2012 and 2021. This result was driven by 4.9% yearly revenue growth, an expanding profit margin, and a share count reduced by an average of -3.1% per year.
Earnings dropped slightly due to the impact of the COVID–19 pandemic in 2020. For example, in 2019, the company earned $17.29 compared with $16.18 per share for FY2020, which decreased by 6.4%. However, the company generated record results in 2021 and is on track to significantly surpass even those results in 2022.
Additionally, higher prices caused by supply chain issues should bring a higher growth rate for the company.
Source: Investor Presentation
The above image shows us Grainger will continue to grow the business, culminating in roughly $19.5 billion in revenue and adjusted earnings of $40 per share in 2025.
The company will also deepen customer relationships through service-based offerings, which should help increase same-customer sales and total revenue.
In addition, GWW is expanding its addressable market with new products and new customer segments.
For the second quarter of FY 2022, Grainger returned $219 million to shareholders through dividends and share repurchases. This will continue to help drive earnings growth, as the company has decreased its share count by an average rate of 3.1% per year since 2012.
Overall, we expect GWW to grow earnings-per-share by 5.5% per year over the next five years.
Competitive Advantages & Recession Performance
Grainger’s most significant competitive advantage is that the company is 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. Because Grainger is the largest MRO industrial distributor in North America, the company benefits from volume-based discounts and other sales incentives that 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:
- 2007 adjusted earnings-per-share: $4.94
- 2008 adjusted earnings-per-share: $6.04 (22% increase)
- 2009 adjusted earnings-per-share: $5.25 (13% decline)
- 2010 adjusted earnings-per-share: $6.80 (30% increase)
This growth during the Great Recession speaks volumes about the company’s resilience. As mentioned above, the company performed well during the COVID-19 pandemic, with only 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 GWW to earn $28.00 per share this year. As a result, the stock is currently trading at a price-to-earnings ratio of 18.4.
Over the past decade, the shares of Grainger have traded with an average P/E ratio of 19.0 times earnings. 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 P/E multiple declines from 18.4 to 18.0 over the next five years, shareholder returns would be reduced by 0.4% per year.
However, dividends and earnings-per-share growth will boost shareholder returns. GWW shares currently yield 1.3%. And, we expect 5.5% annual EPS growth over the next five years.
Putting it all together, GWW stock is expected to generate annual returns of 6.4% over the next five years.
Final Thoughts
Grainger is a solid company with a tremendous earnings and dividend growth history. It is a relatively new member of the Dividend King list, which has increased its dividend for over 50 consecutive years.
However, the shares are trading higher than our fair value estimate. As a result, the total return potential comes in at 6.4% 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 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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