Up to date on October thirtieth, 2024 by Felix Martinez
W.W. Grainger, Inc. (GWW) not too long ago elevated its dividend for the 52nd consecutive yr. This implies Grainger is on the unique checklist of Dividend Kings, who’ve raised their dividend payouts for not less than 50 years.
We imagine high quality dividend progress shares just like the Dividend Kings are enticing for long-term buyers. For that reason, we compiled a full checklist of all Dividend Kings.
You possibly can obtain the total checklist of Dividend Kings, plus vital monetary metrics comparable to dividend yields and price-to-earnings ratios, by clicking on the hyperlink beneath:
Grainger has maintained its Dividend King standing because of its superior place in its business. Its aggressive benefits have fueled the corporate’s long-term progress.
Grainger ought to continue to grow its dividend for a lot of extra years as we see continued progress within the business-to-business distributors of the upkeep, restore, and operations (“MRO”) provides business.
This text will talk about Grainger’s enterprise mannequin, progress catalysts, and anticipated returns.
Enterprise Overview
W.W. Grainger, headquartered in Lake Forest, IL, is among the world’s largest business-to-business provide distributors of upkeep, restore, and operations (“MRO”).
Grainger, based in 1927, generated gross 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 greater than 4.5 million energetic prospects, with greater than 30 million merchandise provided globally.
Supply: Investor Presentation
It has additionally adjusted swiftly to the increase of e-commerce, as greater than 75% of its orders within the U.S. are positioned through digital channels.
The corporate reported its second-quarter 2024 monetary outcomes, posting gross sales of $4.3 billion, a 3.1% enhance, or 5.1% on a each day, natural fixed forex foundation. Working margin dropped to fifteen.1%, down by 70 foundation factors from the prior yr, although on an adjusted foundation, the margin was 15.4%, representing a smaller 40 foundation level decline. Diluted earnings per share (EPS) rose 2.5% to $9.51, or $9.76 on an adjusted foundation, marking a 5.2% enhance from the second quarter of 2023. The corporate additionally returned $345 million to shareholders by way of dividends and share repurchases, narrowing its 2024 earnings steerage vary to an EPS of $38.00 to $39.50.
Progress was pushed primarily by Grainger’s Excessive-Contact Options – N.A. and Limitless Assortment segments. The Excessive-Contact Options section recorded a 3.1% gross sales enhance, or 3.7% on a each day, natural foundation, with all areas experiencing quantity progress. In the meantime, the Limitless Assortment section noticed each day gross sales develop by 3.3% or 11.7% on a continuing forex foundation, because of robust efficiency from B2B prospects at Zoro and MonotaRO, offset partially by a discount in non-core buyer exercise at Zoro. Gross revenue margin remained flat at 39.3%, with minor variances inside particular person segments, as product and buyer combine modifications created modest strain.
The corporate’s working money movement reached $411 million, partially decreased by working capital calls for, whereas capital expenditures have been $76 million, resulting in a free money movement of $335 million. Grainger additionally adjusted its 2024 steerage, narrowing gross sales progress expectations to between 3.2% and 5.2% and projecting working money movement between $1.95 billion and $2.15 billion. The efficient tax fee declined to 22.9%, aiding earnings progress. In line with CEO D.G. Macpherson, the outcomes mirror the corporate’s disciplined concentrate on operational effectivity amidst a slower demand atmosphere, positioning it to attain sustained success within the yr’s second half.
Supply: Investor Presentation
Progress Prospects
Grainger’s earnings per share elevated at a median annual compound fee of 11.2% between 2013 and 2022. This consequence was pushed by 5.5% annual income progress, an increasing revenue margin, and a 3.3% common annual lower within the share depend.
Earnings per share decreased 6% in 2020 because of the pandemic, from $17.29 in 2019 to $16.18 in 2020. Such a small lower throughout a fierce recession is definitely passable and confirms the resilience of the corporate to downturns. The corporate has recovered strongly from the pandemic, with document ends in 2021 and 2022. The corporate is on observe for one more document in earnings per share this yr.
Furthermore, Grainger has ample room for future progress. It’s the largest participant in Excessive-Tech Options however has a market share of solely 7% within the North American market.
Supply: Investor Presentation
Grainger additionally has loads of room to develop its Limitless Assortment enterprise. The corporate is increasing its addressable market with new merchandise and new buyer segments.
Furthermore, the corporate will deepen buyer relationships by way of service-based choices, which ought to assist enhance same-customer gross sales and complete income.
Total, we anticipate Grainger to develop its earnings per share by 8% per yr over the subsequent 5 years.
Aggressive Benefits & Recession Efficiency
Grainger’s most important aggressive benefit is its robust place as an business chief in MRO merchandise. We imagine that the corporate has a stable potential to withstand pressures from new (e.g., Amazon) and current companies within the MRO market.
Strong provider relationships construct this exclusivity. As Grainger is the biggest MRO industrial distributor in North America, it advantages from volume-based reductions and different gross sales incentives that might be unattainable by smaller distributors.
These aggressive benefits present the corporate with constant progress, even throughout financial downturns. Grainger’s earnings elevated in the course of the Nice Recession.
Grainger’s earnings-per-share in the course of the recession are as follows:
- 2007 adjusted earnings-per-share: $4.94
- 2008 adjusted earnings-per-share: $6.04 (22% enhance)
- 2009 adjusted earnings-per-share: $5.25 (13% decline)
- 2010 adjusted earnings-per-share: $6.80 (30% enhance)
This progress in the course of the Nice Recession speaks volumes concerning the firm’s resilience to financial downturns. As talked about above, the corporate carried out nicely in the course of the COVID-19 pandemic, with only a 6% earnings decline in 2020.
Total, the corporate sports activities an A+ credit standing from S&P with a internet leverage ratio of 1.0, which could be very stable. Thus, Grainger has the steadiness sheet power to face up to one other recession.
Valuation & Anticipated Returns
We anticipate Grainger to earn $38.75 per share this yr, so the inventory is presently buying and selling at a price-to-earnings ratio of 28.5.
Over the previous decade, the shares of Grainger have traded with a median price-to-earnings ratio of 19.4. We’re utilizing 21 occasions earnings as a good worth baseline, contemplating a barely slower anticipated progress fee and a rising fee atmosphere.
Because of this, we view the inventory as overvalued.
If the price-to-earnings ratio declines from 28.5 to 21.0 over the subsequent 5 years, shareholder returns shall be decreased by 5% per yr.
Nevertheless, dividends and earnings-per-share progress will increase shareholder returns. Grainger has a present dividend yield of 0.8%. Given the 8% annual progress of earnings per share over the subsequent 5 years, the inventory of Grainger is anticipated to generate a median annual complete return of three.8% over the subsequent 5 years.
Closing Ideas
Grainger is a stable firm with an amazing earnings and dividend progress historical past. It has grown its dividend for 52 consecutive years and is a comparatively new member of the Dividend King checklist.
Nevertheless, the shares are buying and selling considerably larger than our truthful worth estimate. Because of this, the entire return potential is 3.8% per yr over the subsequent 5 years.
Although the entire return proposition doesn’t seem compelling, the corporate’s resilience, low dividend payout ratio (21%), and spectacular dividend progress streak are notable. Nonetheless, shares earn a maintain score on the present worth.
The next articles comprise shares with very lengthy dividend or company histories, ripe for choice for dividend progress buyers:
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