The most recent dividend increase was in April 2014, when the Board of Directors approved a 16.10% increase in the quarterly dividend to $1.08/share.
The company’s largest competitors include Fastenal (FAST), Wesco International (WCC) and Applied Industrial Technologies (AIT).
Over the past decade this dividend growth stock has delivered an annualized total return of 16.30% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.
The company has managed to deliver a 13.80% average increase in annual EPS over the past decade. W.W. Grainger is expected to earn $13.01 per share in 2015 and $14.41 per share in 2016. In comparison, the company earned $11.45/share in 2014.
Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 92 million in 2005 to 69 million by 2015. For the past 30 years, the number of outstanding shares has been reduced by approximately one half.
W.W. Grainger is a leading distributor of maintenance, repair and operations products. The North American market is highly fragmented, and is characterized by annual revenues of approximately $150 billion. Grainger accounts for approximately 6% of it. The company can grow earnings through acquisitions, international expansion, gaining market share. The company has years of growth ahead of it. Some of that growth could be generated by going after small and medium sized customers. Currently, the company has a much better presence with larger customers. The company’s online platform could also generate higher sales growth, and lower costs for itself and customers. W.W. Grainger generates close to one third of its revenues from this online channel.
Approximately 88% of revenues are derived from North America (US and Canada). There is the opportunity to grow revenues by expanding internationally. Currently, W.W. Grainger has operations in Canada, Japan, Mexico, India, China, Panama and in Europe.
W.W. Grainger has scale and relationships with suppliers and customers (SME). Its size provides cost advantage relative to fragmented peers. The company also has strong relationships with manufacturers, which provides rebates and helps in maintaining a cost advantage.
In addition, W.W. Grainger is more efficient than its biggest competitor Fastenal. It manages to generate more revenue with less employees and less physical locations. However, those locations are generally larger, and have much more SKU’s and items per store.
The annual dividend payment has increased by 18.10% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will be much lower than that however, and will be limited by the growth in earnings per share.
An 18% growth in distributions translates into the dividend payment doubling every four years on average. If we check the dividend history, going as far back as 1977, we could see that W.W. Grainger has managed to double dividends almost every six years on average.
In the past decade, the dividend payout ratio has increased from 24.30% in 2005 to 36.40% by 2014. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
W.W. Grainger has also managed to grow return on equity from a low of 15.90% in 2005 to 24.50% in 2014. I generally like seeing a high return on equity, which is also relatively stable over time.
Currently, W.W. Grainger is selling for 18 times forward earnings and yields 1.80%. Despite the fact that I typically require a higher initial yield, I like the growth story and the growth prospects behind this company. As a result, I recently initiated a half position in W.W. Grainger. I would consider adding to my position if current yields exceed 2%. I would really consider load up on this company if yields exceed 2.50%.
Full Disclosure: Long GWW
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The little stock that could! Thanks for putting this on my radar.
ReplyDeleteThanks D! You are awesome!
ReplyDeleteAlways a pleasure to read your research and to see what you're up to.
J
DGI,
ReplyDeleteThe yield has now hit 2%. Are you still happy with your purchase? I am considering adding GWW to my portfolio. The growth story is really good once you dig into the numbers.
Thanks,
Keith
I still like GWW. But i also have a lot of other companies on my radar.
Delete