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 premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 167.9% premium to its calculated fair value of $341.55. GWW did not earn any Stars in this section.
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 two Stars in this section for 1.) and 2.) 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% The company has paid a cash dividend to shareholders every year since 1965 and has increased its dividend payments for 53 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
The negative NPV MMA Diff. means that on a NPV basis the dividend earnings from an investment in GWW would be less than a similar amount invested in MMA earning a 20-year average rate of 3.75%. If GWW grows its dividend at 6.3% per year, it will never equal a MMA yielding an estimated 20-year average rate of 3.75%.
Peers: The company’s peer group includes: Fastenal Co. (FAST) with a 2.5% yield, GATX Corp. (GATX) with a 1.8% yield, and Applied Industrial Technologies, Inc. (AIT) with a 0.8% yield.
Conclusion: GWW did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks GWW as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $272.40 before GWW's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 53 years of consecutive dividend increases. At that price the stock would yield 3.0%.
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 6.8%. This dividend growth rate is above the 6.3% used in this analysis, thus providing no 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.
The company's solid balance sheet with reasonable debt and strong free cash flows allows it to invest in growth opportunities, raise dividends and reinvest capital through share repurchases. Its Free cash Fllow Payout of 23% (down from 33%) is well below my maxximum. In addition, its Debt to total Equity of 44% (down from 47%) is slightly below my maxximum. With its good dividend fundamentals, I would give the stock serious consideration as an addition to my Dividend Growth Stocks Portfolio, except for its low yield and excessive valuation.
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 Portfolio holdings here.
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Tags: GWW, FAST, GMT, AIT,
