W W Grainger Inc (GWW): Counter-Cyclical Cash Flow and 44 Straight Years of Dividend Growth

Dividend Analysis

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. GWW’s long-term dividend and fundamental data charts can all be seen by clicking here.

Dividend Safety Score

Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

GWW’s dividend is literally one of the most reliable payments you can find. The company’s dividend Safety Score is an outstanding 100. Let’s learn why.

Over the last four quarters, GWW’s dividend has consumed 40% of its earnings and 50% of its free cash flow. As seen below, the company’s payout ratios have increased slightly over the last decade but have remained fairly stable. This means that GWW’s dividend growth has largely been fueled by earnings growth, a healthy situation. Payout ratios below 50% also provide plenty of cushion and room for future dividend growth.

Source: Simply Safe Dividends

Source: Simply Safe Dividends

As we mentioned in our introduction, GWW’s business is sensitive to the broader economy. However, many MRO products are “mission-critical” and needed by businesses regardless of how the economy is doing. If a valuable piece of equipment breaks down, it needs to be fixed. As seen below, GWW’s sales fell by 9% during fiscal year 2009, and the company’s earnings contracted by just 6%. Not bad for an industrial business! GWW’s stock also outperformed the S&P 500 by 29% in 2008.

Source: Simply Safe Dividends

It’s also worth noting that GWW’s business model has generated extremely predictable free cash flow every single year over the last decade. Importantly, distributors actually generate more free cash flow during recessions (see the jump in fiscal year 2009) because they are able to collect their accounts receivables and liquidate some of their inventory, freeing up cash. You will also note in our earlier graph of GWW’s free cash flow payout ratio that the company’s payout ratio dropped from 35% in 2008 to 23% in 2009 as a result. This unique business model characteristic further strengthens the security of GWW’s dividend.

Source: Simply Safe Dividends