Company Description: W.W. Grainger Inc. is the largest global distributor of industrial and commercial supplies, such as hand tools, electric motors, light bulbs, and janitorial items.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
GWW is trading at a discount to 1.) and 2.) above. The stock is trading at a slight discount to its calculated fair value of $88.65. GWW earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
GWW earned one Star in this section for 2.) above. GWW earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1965 and has increased its dividend payments for 38 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to > MMA
GWW earned a Star in this section for its NPV MMA Diff. of the $678. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as GWW has. If GWW grows its dividend at 11.1% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 3.9%.
Other: GWW is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. GWW has a excellent record of growing both earnings and dividends. In the near-term GWW will likely face tough markets due to slow economic conditions. Long-term initiatives to enhance their distribution should help the company increase market share. Risks include economic conditions, pricing pressures and an adverse ruling from the Department of Justice related to compliance issues on a U.S. government contract.
Conclusion: GWW earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks GWW as a 3 Star-Hold.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $95.89 before GWW’s NPV MMA Differential fell to the $500 that I like to see for a stock with 38 years of consecutive dividend increases. At that price the stock would yield 1.86%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 10.4%. This dividend growth rate is lower than the the 11.1% used in this analysis, thus providing a margin of safety. GWW has a risk rating of 1.25 which classifies it as a low risk stock.
For GWW, the difference between a 3-Star Hold and a 4-Star buy is negative cash flow in 1999. I could look beyond the negative cash flow 10 years ago if that were the only thing keeping me from buying GWW. Even though GWW is trading slightly below my calculated buy price of $88.65, I will pass for now since the 2% dividend yield is below the 2.75% I am currently looking for. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in GWW (0.0% of my Income Portfolio).
What are your thoughts on GWW?
This article originally appeared on The DIV-Net August 31, 2009.