Grainger's Enormous Growth Potential

Jul. 7.14 | About: W.W. Grainger, (GWW)


Grainger is gobbling up market share in the maintenance, repair, and operations industry.

The company recently increased its dividend 16%.

Grainger has grown revenue per share over 10% for the last decade.

Shareholders of Grainger can expect a strong CAGR between 9.2% and 14.2%.

Grainger is strengthening its competitive advantage in the maintenance, repair, and operations industry.

Grainger (NYSE:GWW) is North America's leading broad line supplier of maintenance, repair, and operating products. The company recently announced a dividend increase of 16%, marking the 43rd consecutive year of dividend increases for Shareholders of Grainger.

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Source: Grainger 2014 Shareholder Meeting

Current Events

The bulk of Grainger's revenue and profits are generated in the US. The company is slowly expanding into Canada, and other international markets around the world. In 2013, 90% of Grainger's operating earnings came from the US.

Source: William Blair Growth Stock Conference Presentation

Grainger grew revenue 5% in 2013, and has grown revenues in the first quarter of 2014 versus the first quarter of 2013. Global growth in the maintenance, repair, and operations (NYSE:MRO) industry is driving Grainger's growth. The company is continuously gaining market share in the highly fragmented MRO industry.

Source: 2014 Grainger Factbook

Currently, Grainger owns only 6% of the $145 billion North American MRO industry. The lack of a dominant player in the MRO industry gives Grainger a long runway for growth going forward. The company expects 3% to 4% sales growth from gains in market share in 2014. Grainger's economies of scale improve as the company grows. The more market share Grainger gains, the stronger its competitive advantage. This positive feedback loop will drive Grainger's sales and earnings higher as long as the MRO industry remains fragmented.

Shareholder Return

Shareholders of Grainger can expect strong returns going forward. The company currently has a dividend yield of 1.7%. Grainger has repurchased shares at a rapid clip in the past, and will likely to continue to do repurchase between 2.5% and 3.5% of its market cap each year. Finally, the company expects organic revenue growth of between 5% and 9%. Shareholders of Grainger can expect a CAGR of between 9.2% and 14.2% going forward from dividends (1.7%), share repurchases (2.5% to 3.5%), and organic growth (5% to 9%).


Grainger has a current P/E ratio of 22.42. The company appears to be fairly valued based on its P/E ratio compared to its peers ad its future growth opportunities.





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Source: Finviz

Consecutive Years of Dividend Increases

Grainger has increased its dividend payments for 43 consecutive years. The business' ability to grow profitably for over 4 decades shows Grainger possesses a durable competitive advantage within the MRO industry.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Dividend Yield

Grainger has a current dividend yield of 1.7%. The company has the 97th highest dividend yield out of 128 businesses with 25+ years of dividend payments without a reduction.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio

Grainger has a low payout ratio of just 25.80%. Shareholders of Grainger should receive dividend increases well in excess of overall business results. Grainger's recent 16% dividend hike shows the company is increasing its dividends faster than overall business growth. Grainger has the 34th lowest payout ratio of 128 businesses with 25+ years of dividend payments without a reduction.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

Granger has grown revenue per share at just over 10% per year for the last decade. The company's strong revenue per share growth is very likely to continue over the next several years. Grainger has the 7th highest revenue per share growth rate out of 128 businesses with 25+ years of dividend payments without a reduction.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

Grainger has a long-term standard deviation of about 26%. The company has the 51st lowest volatility out of 128 businesses with 25+ years of consecutive dividend payments without a reduction.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race, page 3


Grainger has proven it can consistently steal market share in a highly fragmented growing industry. The company has a long history of shareholder friendly decisions, including 43 consecutive dividend payments and several years of share repurchases.

Grainger ranks very highly based on the 8 Rules of Dividend Investing. It is the 12th highest ranked business out of 128 with 25+ years of consecutive dividend payments without a reduction. The company is a member of the Sure Dividend model portfolio due to its impressive growth and low payout ratio. Shareholders of Grainger can look forward to a long growth runway and continued dividend increases and earnings per share growth.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.