Company Description: 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: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
GWW is trading at a discount to only 2.) above. The stock is trading at a 37.0% discount to its calculated fair value of $404.48. 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:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
GWW earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. GWW earned a Star for having an acceptable score in at least two of the four Key Metrics measured.
Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2004-2007, 2005-2008, 2006-2009, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1965 and has increased its dividend payments for 43 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) or Treasury bond? 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:
1. NPV MMA Diff.
2. Years to > MMA
GWW earned a Star in this section for its NPV MMA Diff. of the $2,484. 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 16.2% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 2.98%.
Memberships and Peers: GWW is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company’s peer group includes: Fastenal Co. (FAST) with a 2.2% yield, GATX Corp. (GMT) with a 2.4% yield, and Applied Industrial Technologies, Inc. (AIT) with a 2.2% yield.
Conclusion: GWW earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks GWW as a 5-Star Very Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $471.82 before GWW's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 43 years of consecutive dividend increases. At that price the stock would yield 0.9%.
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 10.6%. This dividend growth rate is lower than the 16.2% used in this analysis, thus providing a margin of safety. GWW has a risk rating of 1.50 which classifies it as a Low risk stock.
GWW has a excellent record of growing both earnings and dividends. The company's enjoys competitive advantages from its diverse product line, localized products and scale. Long-term the company should continue to expand its geographic reach and market share while targeting its higher-margin private label line, and should also see demand for maintenance and repair products.
In mid-October the company reported third-quarter 2014 earnings per share of $3.30, up 12% from $2.95 per share in the prior-year quarter. GWW reduced the top end of its earnings per share (EPS) guidance for fiscal 2014 to the range of $12.20 to $12.30 from $12.20–$12.60. The company’s single channel businesses in Japan and the United States continue to perform well, while outside of North America the performance of several multichannel businesses has not met expectations. GWW is evaluating additional markets for expansion of the single channel model.
GWW's solid balance sheet with low debt and strong free cash flows allow it to invest in growth opportunities, raise dividends and reinvest capital through share repurchases. In spite of its exceptional dividend fundamentals, GWW's low yield (1.6%) prevent me from giving the stock serious consideration at this time in my legacy income portfolios. However, it might be a candidate for my new High Growth Dividend Portfolio.
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 Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
Related Articles:
- Johnson & Johnson: Well Positioned In The Healthcare Industry
- Dividend Stock Analysis: Windows Is Still A Central Part Of Microsoft's Business
- Chevron Corporation: Is Now The Right Time To Add To Your Position?
- Realty Income Corp. Dividend Stock Analysis
- Wal-Mart Is Facing Fierce Competition
- More Stock Analysis
Tags: GWW, FAST, GMT, AIT,