W. W. Grainger Inc: A Future Dividend King on the Rise
This Dividend Stock is Special
In the world of dividend stocks, few companies have served income investors better than the “Dividend Kings.” By definition, a Dividend King is a company that has raised its dividend every year for at least 50 consecutive years—a very tough requirement indeed. Among the thousands of companies trading on U.S. stock exchanges, there are only 26 Dividend Kings as of this writing.
That’s why today, I want to talk to you about a company that is on track to earn the Dividend King title: W. W. Grainger Inc (NYSE:GWW).
To the average consumer, W. W. Grainger probably won’t sound like a familiar name, and that’s because the company doesn’t really serve the consumer market directly. Instead, W. W. Grainger is a leading broad line supplier of maintenance, repair and operating products (MRO) in North America. The company also has operations in Asia, Europe, and Latin America.
As you’d expect from an MRO supplier, W. W. Grainger Inc makes money from business-to-business sales rather than retail sales. The company has been around for more than nine decades is now one of the biggest players in the industry. Last year, its net sales totaled over $11.0 billion. (Source: “Grainger Reports Results For The 2018 Fourth Quarter And Full Year,” W. W. Grainger Inc, January 24, 2019.)
If you look up W. W. Grainger’s stats on Yahoo! Finance or MarketWatch, you’ll see that it doesn’t really stand out for the size of its current dividend stream. Trading at $272.36 per share, the company offers an annual dividend yield of 2.1%.
Instead, what makes W. W. Grainger Inc special is how the company has grown that payout over the years.
On April 24, 2019, the company announced a six-percent increase to its quarterly dividend rate to $1.44 per share. The announcement marked GWW’s 48th consecutive annual dividend hike. In other words, if the company keeps on delivering annual dividend increases, it will be crowned as a Dividend King in two years. (Source: “Grainger Increases Quarterly Dividend By 6 Percent And Authorizes Repurchase Of Additional 5 Million Shares,” W. W. Grainger, April 24, 2019.)
More Dividend Hikes to Come?
The best part is, based on what the company has been doing, it should have no problem keeping that track record alive.
You see, while W. W. Grainger is a decades-old company operating in a relatively boring industry, business has been booming. Last year, net sales grew 7.5% year-over-year to $11.2 billion. The bottom line result was even more impressive; excluding special items, the company’s adjusted earnings came in at $16.70 per share in 2018, up a whopping 45.7% from the $11.46 per share generated in 2017. (Source: “Grainger Reports Results For The 2018 Fourth Quarter And Full Year,” W. W. Grainger Inc, January 24, 2019.)
Considering that GWW declared and paid total dividends of $5.36 per share last year, its adjusted profit covered the payout more than three times over.
Mind you, paying a dividend is not the only way through which this Lake Forest, Illinois-based industrial supply company returns cash to investors; it also buys back its shares. Last year, W. W. Grainger Inc spent $425.0 million buying back 1.4 million shares. This reduced the number of shares outstanding, hence allowing each existing investor to own a slightly larger portion of the company. Since 2014, GWW’s stock buyback program has reduced the number of shares outstanding by over 15%.
And the company doesn’t seem to be stopping anytime soon. In the latest dividend hike announcement, W. W. Grainger also announced a new five-million-share stock buyback program. To put it in perspective, GWW had around 55 million shares outstanding at the time of the announcement. (Source: Ibid.)
The Bottom Line on GWW Stock
In this day and age, solid dividend growth stocks are highly sought after, meaning the most well-known ones have already gotten expensive. And that’s another reason to consider GWW stock: despite its impressive payout increase track record, the company actually offers relatively good value for money.
At the time of this writing, W. W. Grainger Inc has a price-to-earnings ratio of 20.72 times, a price-to-sales ratio of 1.02 times, and a price-to-cash-flow ratio of 12.74 times. The industry it belongs to (industrial machinery and equipment), on the other hand, currently has an average price-to-earnings ratio of 24.82 times, an average price-to-sales ratio of 4.27 times, and an average price-to-cash-flow ratio of 19.19 times. (Source: “W W Grainger Inc (GWW.N),” Reuters, last accessed June 14, 2019.)
In other words, the company appears to be undervalued compared to its peers. Adding in the fact that it is on track to become a Dividend King, GWW stock deserves the attention of dividend growth investors.