Up to date on October thirtieth, 2024 by Felix Martinez
W.W. Grainger, Inc. (GWW) just lately elevated its dividend for the 52nd consecutive 12 months. 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 development shares just like the Dividend Kings are engaging for long-term traders. For that reason, we compiled a full checklist of all Dividend Kings.
You’ll be able to obtain the total checklist of Dividend Kings, plus vital monetary metrics corresponding to dividend yields and price-to-earnings ratios, by clicking on the hyperlink beneath:
Grainger has maintained its Dividend King standing due to its superior place in its trade. Its aggressive benefits have fueled the corporate’s long-term development.
Grainger ought to continue to grow its dividend for a lot of extra years as we see continued development within the business-to-business distributors of the upkeep, restore, and operations (“MRO”) provides trade.
This text will focus on Grainger’s enterprise mannequin, development catalysts, and anticipated returns.
Enterprise Overview
W.W. Grainger, headquartered in Lake Forest, IL, is likely one of 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 lively 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 by way of 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 12 months, 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 via dividends and share repurchases, narrowing its 2024 earnings steerage vary to an EPS of $38.00 to $39.50.
Development was pushed primarily by Grainger’s Excessive-Contact Options – N.A. and Infinite Assortment segments. The Excessive-Contact Options phase recorded a 3.1% gross sales enhance, or 3.7% on a each day, natural foundation, with all areas experiencing quantity development. In the meantime, the Infinite Assortment phase noticed each day gross sales develop by 3.3% or 11.7% on a continuing forex foundation, due to sturdy 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 adjustments created modest stress.
The corporate’s working money circulation reached $411 million, partially diminished by working capital calls for, whereas capital expenditures have been $76 million, resulting in a free money circulation of $335 million. Grainger additionally adjusted its 2024 steerage, narrowing gross sales development expectations to between 3.2% and 5.2% and projecting working money circulation between $1.95 billion and $2.15 billion. The efficient tax fee declined to 22.9%, aiding earnings development. Based on CEO D.G. Macpherson, the outcomes replicate the corporate’s disciplined deal with operational effectivity amidst a slower demand surroundings, positioning it to attain sustained success within the 12 months’s second half.
Supply: Investor Presentation
Development Prospects
Grainger’s earnings per share elevated at a median annual compound fee of 11.2% between 2013 and 2022. This outcome was pushed by 5.5% annual income development, an increasing revenue margin, and a 3.3% common annual lower within the share depend.
Earnings per share decreased 6% in 2020 as a result of pandemic, from $17.29 in 2019 to $16.18 in 2020. Such a small lower throughout a fierce recession is actually passable and confirms the resilience of the corporate to downturns. The corporate has recovered strongly from the pandemic, with file leads to 2021 and 2022. The corporate is on observe for one more file in earnings per share this 12 months.
Furthermore, Grainger has ample room for future development. 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 Infinite Assortment enterprise. The corporate is increasing its addressable market with new merchandise and new buyer segments.
Furthermore, the corporate will deepen buyer relationships via service-based choices, which ought to assist enhance same-customer gross sales and whole income.
Total, we count on Grainger to develop its earnings per share by 8% per 12 months over the following 5 years.
Aggressive Benefits & Recession Efficiency
Grainger’s most vital aggressive benefit is its sturdy place as an trade chief in MRO merchandise. We imagine that the corporate has a strong potential to withstand pressures from new (e.g., Amazon) and present companies within the MRO market.
Stable provider relationships construct this exclusivity. As Grainger is the most important MRO industrial distributor in North America, it advantages from volume-based reductions and different gross sales incentives that will be unattainable by smaller distributors.
These aggressive benefits present the corporate with constant development, even throughout financial downturns. Grainger’s earnings elevated through the Nice Recession.
Grainger’s earnings-per-share through 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 development through the Nice Recession speaks volumes in regards to the firm’s resilience to financial downturns. As talked about above, the corporate carried out nicely through 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 web leverage ratio of 1.0, which may be very strong. Thus, Grainger has the stability sheet power to face up to one other recession.
Valuation & Anticipated Returns
We count on Grainger to earn $38.75 per share this 12 months, so the inventory is at present 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 development fee and a rising fee surroundings.
Consequently, we view the inventory as overvalued.
If the price-to-earnings ratio declines from 28.5 to 21.0 over the following 5 years, shareholder returns can be diminished by 5% per 12 months.
Nonetheless, dividends and earnings-per-share development will enhance shareholder returns. Grainger has a present dividend yield of 0.8%. Given the 8% annual development of earnings per share over the following 5 years, the inventory of Grainger is anticipated to generate a median annual whole return of three.8% over the following 5 years.
Remaining Ideas
Grainger is a strong firm with an amazing earnings and dividend development historical past. It has grown its dividend for 52 consecutive years and is a comparatively new member of the Dividend King checklist.
Nonetheless, the shares are buying and selling considerably increased than our truthful worth estimate. Consequently, the overall return potential is 3.8% per 12 months over the following 5 years.
Though the overall return proposition doesn’t seem compelling, the corporate’s resilience, low dividend payout ratio (21%), and spectacular dividend development streak are notable. Nonetheless, shares earn a maintain ranking on the present value.
The next articles comprise shares with very lengthy dividend or company histories, ripe for choice for dividend development traders:
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