Updated on January 23rd, 2023 by Nathan Parsh
Every year, we individually review each of the 65 Dividend Aristocrats. The Dividend Aristocrat we’ll discuss here is WW Grainger, Inc. (GWW).
Grainger has increased its dividend for 51 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:
Grainger’s financial health is closely tied to the broader economy as a manufacturer of industrial products. The company faced hardships when the coronavirus pandemic significantly impacted global economic growth, but earnings bounced back strongly in 2021, which continued into 2022.
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 generated sales in excess of $14 billion over the past four quarters. You can see an overview of Grainger’s business in the image below:
Source: IInvestor Presentation
Grainger reported its third-quarter earnings results on October 26th, 2022. For the quarter, revenue equaled $3.9 billion, representing a 16.9% increase on a reported basis and a gain of 20.3% on a daily, constant currency basis compared to the third quarter of 2021. Results were driven by primarily by the High-Touch Solutions segment achieving daily sales growth of 19.4% due to both strong price increases and continued volume growth across all geographies.
Net income equaled $426 million, or $8.27 per share, compared to net income of $297 million, or $5.65 per share, over the same prior-year quarter.
Following better than expected results, leadership revised its 2022 guidance for the company. Sales are now projected to be $15.1 billion to $15.2 billion, up from $15 billion to $15.2 billion. Earnings-per-share is now expected to be from $29.10 to $29.70, up from $27.25 to $28.75.
Grainger lays out a number of growth initiatives in the US, 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.
The company sees multiple avenues to generate future growth, the most important of which is that Granger operates in a highly fragmented market.
Source: Investor Presentation
The company sees the total US business-to-business supply market as a $1.4 trillion market, of which it captures only approximately 7% right now. Grainger sees its addressable US market at roughly $165 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 6.5% 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 helps 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 remain 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. This demonstrates the company’s ability to rebound from adverse market conditions.
Valuation & Expected Returns
Based on the expected earnings-per-share of $29.40 for 2022 and a current share price of ~$566, the stock has a price-to-earnings ratio of 19.3.
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 1.3% annual valuation headwind.
Weighing this potential decline in valuation multiple against a 6.5% earnings growth rate and the 1.2% dividend yield, investors could anticipate a total expected return of 6.2% per year for the next five years.
WW 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 51 straight 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 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:
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
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