Thursday, April 17, 2008

GWW Dividend Analysis

W.W. Grainger, Inc. supplies facilities maintenance and other-related products in North America. It operates in three segments: Grainger Branch-based, Acklands Grainger Branch-based (Acklands Grainger), and Lab Safety Supply, Inc. (Lab Safety). Air Products and Chemicals, Inc. offers atmospheric gases, process and specialty gases, performance materials, and equipment and services worldwide.

The company is a dividend aristocrat as well as a major component of the S&P 500 index. It has been increasing its dividends for the past 36 consecutive years. From 1998 up until 2007 this dividend growth stock has delivered an annual average total return of 8.00 % to its shareholders.

At the same time GWW has managed to deliver an 8.20% average annual increase in its EPS since 1998.

The ROE has remained in the 10-20% range over the past 10 years. It fell to a low of 10% in 2001 from a high of 18% in 1998 before rebounding strongly to 20% in 2007.

Annual dividend payments have increased over the past 10 years by an average of 9.8% annually, which is higher than the growth in EPS. A 10% growth in dividends translates into the dividend payment doubling almost every 7 years. If we look at historical data, going as far back as 1978, GWW has actually managed to double its dividend payment every seven years on average.

If we invested $100,000 in GWW on December 31, 1997 we would have bought 2120 shares (Adjusted for two 2:1 stock split in June 1998). In February 1998 your quarterly dividend income would have been $286. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $860 by November 2007. For a period of 10 years, your quarterly dividend income has increased by 159 %. If you reinvested it though, your quarterly dividend income would have increased by 200%.

The dividend payout has remained at or below 40% over our study period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that GWW is attractively valued with its low price/earnings multiple of 17 and low DPR. The current yield is a little low for me at 1.70% though. Thus I would be a buyer only on dips below $70.
Disclosure: I do not own shares of GWW
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