While GWW’s business is fairly boring and basic, its returns on invested capital are anything but. The company’s lowest annual return on invested capital over the last decade is 15%. GWW is clearly a well-run business with meaningful advantages in the markets it serves.
Source: Simply Safe Dividends
GWW’s consistency and counter-cyclical cash flows certainly provide a deal of comfort. However, analyzing the balance sheet is always relevant. Too much debt can still get even the safest business into unexpected trouble.
GWW recently took on debt to repurchase shares, but its balance sheet still looks to be in decent shape. All of the company’s net debt could be covered with cash on hand and one year of earnings before interest and taxes (EBIT). GWW also has an “AA-” debt rating.
Source: Simply Safe Dividends
Overall, there’s not much to dislike about the quality of GWW’s dividend. The company’s payout ratios are very reasonable, it generates counter-cyclical free cash flow, and the balance sheet is healthy. This is one of the most reliable dividends out there.
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
GWW’s dividend Growth Score of 76 suggests that the company’s dividend growth potential is higher than 76% of all other dividend-paying stocks in the market.
GWW has increased its dividend for 44 consecutive years and is an S&P 500 Dividend Aristocrat. If the company increases its dividend for the next six years as well, it will join the exclusive list of dividend kings, which contains all companies that have raised their dividend for at least 50 straight years.
As seen below, GWW has recorded double-digit dividend growth over all periods during its last 10 fiscal years. While macro headwinds have created a challenging near-term business environment, we expect the company to keep growing its dividend by at least 4-6% per year until conditions improve, at which point growth could return closer to 10%.
Source: Simply Safe Dividends
Valuation
GWW trades at about 16x forward earnings and has a dividend yield of 2.6%, which is significantly higher than its five year average dividend yield of 1.5%.
Assuming macro conditions eventually recover and the company gets back on track with at least mid-single digit organic sales growth, we believe earnings could grow at a high-single digit rate. When combined with GWW’s 2.6% dividend yield, the stock appears to offer double-digit total return potential. Macro conditions could further deteriorate, but patient investors seem likely to be rewarded over the next 3-5 years.
Conclusion
W W Grainger Inc (NYSE:GWW) is a high quality industrial business with strong staying power. Its broad assortment of products, extensive distribution network, reputation for quality, and leading e-commerce presence will likely keep GWW relevant for a long time in the slow-changing MRO market.
The company’s dividend payment is highly secure with above-average growth potential, and macro headwinds have caused this blue chip dividend stock to trade at an attractive price relative to history. Patient dividend growth investors should keep an eye on GWW.
Disclosure: None
