Updated on October 30th, 2024 by Felix Martinez
W.W. Grainger, Inc. (GWW) recently increased its dividend for the 52nd consecutive year. This means Grainger is on the exclusive list of Dividend Kings, who 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.
Grainger should keep growing its dividend for many more years as we see continued growth in the business-to-business distributors of the maintenance, repair, and operations (“MRO”) supplies industry.
This article will discuss Grainger’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”).
Grainger, founded in 1927, generated sales of $16.5 billion in 2023. It has a market capitalization of $53.6 billion and 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.
The company reported its second-quarter 2024 financial results, posting sales of $4.3 billion, a 3.1% increase, or 5.1% on a daily, organic constant currency basis. Operating margin dropped to 15.1%, down by 70 basis points from the prior year, though on an adjusted basis, the margin was 15.4%, representing a smaller 40 basis point decline. Diluted earnings per share (EPS) rose 2.5% to $9.51, or $9.76 on an adjusted basis, marking a 5.2% increase from the second quarter of 2023. The company also returned $345 million to shareholders through dividends and share repurchases, narrowing its 2024 earnings guidance range to an EPS of $38.00 to $39.50.
Growth was driven primarily by Grainger’s High-Touch Solutions – N.A. and Endless Assortment segments. The High-Touch Solutions segment recorded a 3.1% sales increase, or 3.7% on a daily, organic basis, with all regions experiencing volume growth. Meanwhile, the Endless Assortment segment saw daily sales grow by 3.3% or 11.7% on a constant currency basis, thanks to strong performance from B2B customers at Zoro and MonotaRO, offset partially by a reduction in non-core customer activity at Zoro. Gross profit margin remained flat at 39.3%, with minor variances within individual segments, as product and customer mix changes created modest pressure.
The company’s operating cash flow reached $411 million, partially reduced by working capital demands, while capital expenditures were $76 million, leading to a free cash flow of $335 million. Grainger also adjusted its 2024 guidance, narrowing sales growth expectations to between 3.2% and 5.2% and projecting operating cash flow between $1.95 billion and $2.15 billion. The effective tax rate declined to 22.9%, aiding earnings growth. According to CEO D.G. Macpherson, the results reflect the company’s disciplined focus on operational efficiency amidst a slower demand environment, positioning it to achieve sustained success in the year’s second half.
Source: Investor Presentation
Growth Prospects
Grainger’s earnings per share increased at an average annual compound rate of 11.2% 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 in the share count.
Earnings per share decreased 6% in 2020 due to the pandemic, from $17.29 in 2019 to $16.18 in 2020. Such a small decrease during a fierce recession is certainly satisfactory and confirms the resilience of the company to downturns. 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.
Overall, we expect Grainger to grow its earnings per share by 8% 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 resist pressures from new (e.g., Amazon) and existing businesses in the MRO market.
Solid supplier relationships build this exclusivity. As Grainger is the largest MRO industrial distributor in North America, it 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’s earnings increased 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 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 $38.75 per share this year, so the stock is currently trading at a price-to-earnings ratio of 28.5.
Over the past decade, the shares of Grainger have traded with an average price-to-earnings ratio of 19.4. We are using 21 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 overvalued.
If the price-to-earnings ratio declines from 28.5 to 21.0 over the next five years, shareholder returns will be reduced by 5% per year.
However, dividends and earnings-per-share growth will boost shareholder returns. Grainger has a current dividend yield of 0.8%. Given the 8% 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 3.8% 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 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 is 3.8% per year over the next five years.
Even though the total return proposition does not appear compelling, the company’s resilience, low dividend payout ratio (21%), and 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:
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.