W.W. Grainger is North America’s leading broad line supplier of maintenance, repair and operating (MRO) supplies and other related products and services. The company primarily has operations in the U.S. and Canada with a small presence in Europe, Asia, and Latin America. The company has a broad product portfolio consisting of 1.7 million industrial supply products. Grainger also has an extensive network of highly integrated distribution centres, websites, and branches through which it serves 3.5 million businesses and institutions worldwide. It provides products in categories such as safety, material handling, and metalworking, along with services like inventory management and technical support.
Grainger’s segments are the U.S. (72% of 2018 revenue), Canada (6%) and other businesses (22%). The other businesses consist of Zoro, MonotaRO in Japan, and operations in Europe, Asia, and Mexico.Investment Data
- Opportunity Score: 64
- Ticker: NYSE:GWW
- Sector: Industrials
- Industry: Industrial Distribution
- Market Cap: 16.98B
- P/E: 22.51
- Dividend Yield: 1.81%
- Dividend Payout Ratio: 40.82%
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
Revenue Growth & Market Exposure
Grainger has a very strong reputation with customers and its 5,000 suppliers. Its wide base of customers represents diverse industries ranging from commercial and government to healthcare and manufacturing. Grainger uses a combination of the high-touch solutions (customers with complex industrial buying needs in North America and Western Europe) and the endless assortment (customers with less complex needs and includes the Zoro brand in the U.S. and Europe and MonotaRO in Japan) models to serve customers of all sizes. The company is further driving customer acquisition through midsize customer strategy and endless assortment model. The endless assortment businesses have grown revenue at a rate of 26% CAGR over the past four years.
The company has a huge scale advantage. Over nine decades of its existence, Grainger has built a broad assortment of products with high availability and industry-leading fulfillment capabilities. As a leading distributor of MRO products for businesses, Grainger provides a wide range of products in the safety & security (17% of 2018 sales), material handling (11%), metalworking (10%), cleaning & maintenance (9%), pumps & plumbing (4%), power transmission, lighting, etc. categories.
The global MRO market is approximately $608 billion, and Grainger’s estimated addressable market is ~$284 billion. Grainger has a 7% share in the $130 billion addressable U.S. market and 4% in the global market, with ample opportunity for growth. Grainger has strong market positions in its core markets of North America, Western Europe, and Japan, characterized by large market size and fragmented competition. Its wide geographical reach and diverse product mix act as key differentiators. The company also has a growing online presence and nearly 71% of orders in the U.S. originate through a digital channel.
It is difficult for new entrants to match Grainger’s expertise in key areas like safety, inventory management, and e-Commerce. The company’s wide geographical reach, diverse product mix, scale, and broad industry knowledge form a deep moat around its business.
Grainger is an S&P500 Dividend Aristocrat and has delivered 47 consecutive years of dividend growth. It has increased its dividend each year for more than four decades. The company has a sound track record of generating strong cash flow and delivering solid long-term returns to shareholders. In 2018, Grainger returned $741 million in cash to shareholders in the form of dividends and share repurchases.
Grainger sports an annual average dividend yield of 1.7% and has a low payout ratio of 33%. The company last raised its dividend by 7.5% annually. The company has achieved an impressive dividend growth rate of 13.2% CAGR over the last decade. Its EPS has also grown at 8.5% CAGR during the same time period.
Grainger is improving its cost structure and had announced a two-year plan for $200 million in cost savings in 2017. The company has already achieved $130 million in cost savings in 2018. Its strategy of providing a value proposition to customers also succeeded with relevant product pricing in the last couple of years.
Grainger’s strong balance sheet and cash flow generation further allows the company to invest for future growth while returning value to shareholders. The company is focusing on growing its share with Grainger brand in the U.S., Canada, and Mexico as well as with its businesses Cromwell in the U.K. and Fabory in the Netherlands. The company’s continuous efforts to improve its ability to effectively solve customers’ problems through its advantaged MRO solutions should further accelerate customer and volume growth.
The company expects 2%-5% sales growth and 2%-12% EPS growth in 2019. Given the company’s consistent dividend growth and a low payout ratio of 49%, investors can expect a dividend increase at the same rate as last year.
Grainger’s core markets are large and competition is highly fragmented. The company faces intense competition from manufacturers and direct sellers, wholesale distributors, retail enterprises and internet-based businesses. In addition, it also competes with small, local and regional competitors.
W.W. Grainger is in a good position to further solidify its market share position given its advantaged MRO solutions, differentiated sales and services, robust eCommerce platform, and customer service. A low payout ratio, solid capital position and strong cash flow should support the company’s dividend growth streak in the future.
However, considering the roller coaster ride for the stock, investor confidence is unclear. Make sure you have an appropriate thesis when investing in GWW.
DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.