Don’t Underestimate Grainger’s Dividend. That 1.8% Yield Is Bigger Than It Looks
W.W. Grainger’s (GWW) great share price gains have hit a snag, and hints that the company’s sales growth is easing haven’t helped the picture. But there’s little to threaten the company’s steadily rising dividend, which produces long-term returns well above what its current yield suggests.
Grainger, which sells industrial products ranging from fasteners to pumps and lighting, has raised its dividend annually for 41 years. That qualifies the stock for membership in what’s known as the “S&P Dividend Aristocrats,” a group of just over fifty S&P 500 companies that have raised their dividends for at least 25 consecutive years. The company recently increased the quarterly dividend payout by 21 percent, which puts its current dividend yield at about 1.8%.
Yield junkies love such aristocrats, because they know that with regular increases, even a company with only a moderate dividend payout will over time amplify the effective yield investors collect. Back in mid-June of 2006, for example, Grainger shares were trading at $70.63, and paying a $1.16-a-year dividend that provided an unimpressive 1.6% yield. Six years later, after a series of increases boosted the dividend to its current $3.20, the effective dividend yield on those original shares is now a much nicer 4.5%.
Grainger’s solid profits and big cash pile provide protection for the decades-old, shareholder-friendly dividend policy. Two months ago, Grainger reported its most profitable quarter ever, and the company’s profit margins have been reliably strong, helped in part by the company’s growing use of lower-cost online sales platforms. Sales have been trending higher, too.
Historically, Grainger has easily covered its dividend payout, in part because the company throws off plenty of cash. The dividend needs only a tiny part of that.
Over the past five years, Grainger investors have more than doubled their money on just the share price. But news in April that Amazon.com (AMZN) plans a push into the industrial distribution business put pressure on Grainger’s share price. Amazon is a disruptive force in whatever market it enters mainly because it values sales over profits, and it prices its goods accordingly.
It’s not yet clear how much of a threat Amazon will eventually pose to Grainger, although Grainger warned that its breakneck sales growth began to slow in June. The market where Grainger and rival Fastenal (FAST) are the two biggest players is extremely fragmented, and it’s growing fast as U.S. corporations outsource supply-purchasing chores they once handled in-house.
Even after the recent pullback, Grainger’s shares aren’t cheap, but they’re not as richly priced as they had been. For long term oriented dividend investors, the stock’s worth a close look.
Of course, whenever we buy a security for its dividend, we’re also buying the underlying stock, with whatever risks the stock may carry. So it’s important, before committing to a stock, to check out its financial condition. Reading through its 10-K is a good idea, too.
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