Plain Dividend Yield’s For Chumps: Grainger Payout – and Stock Price – Rising Swiftly

YCharts

W.W. Grainger (GWW), a hardware store chain for businesses and institutions has boosted its dividend an annualized 17.8% over the past five years. That puts Grainger in fifth place in YCharts list of the Top 10 dividend growers among S&P’s Dividend Aristocrats -- the 51 companies in the S&P 500 that have managed annual dividend increases for at least 25 years running.

This is part of a series of articles on dividend growth. Prior installments featured Clorox (CLX), T. Rowe Price (TROW), Wal-Mart (WMT), Medtronic (MDT) and Aflac (AFL).

Grainger’s dividend payouts have plenty of room to keep growing. The payout ratio is 31% and the cash dividend payout ratio is below 40%. But if you’re looking for current income, Grainger isn’t going to make it on your short list, compared to Clorox #9 on our list, and McDonald’s (MCD), #3 on our list of the Aristocrats strongest dividend growers.

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GWW Dividend Yield Chart

The “problem” with the dividend yield is the sort of problem investors should crave: as strong as dividend growth has been over the past five years, the stock’s price gain has been nearly twice as impressive, as seen in a stock chart.

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GWW Chart

On a total return basis (dividend payout plus price change) Grainger has a 21.9% five-year annualized gain, the highest among our 10 Aristocrat dividend growers. Lowe’s (LOW), #1 on our list for dividend growth ranks second to Grainger on total return. We’re talking a distant second: Lowe’s five-year annualized total return is 12.7%. For a bit of perspective, both crush the S&P 500’s 3% annualized gain over the past five years.

What’s sort of remarkable is that Grainger has done so well amid a sluggish U.S. economy. As a supplier of maintenance, repair and operation supplies to businesses -- especially manufacturers -- its fortunes are theoretically tied to economic expansion: the more factories and businesses are buzzing, the more supplies they are going to need. Yet the hit Grainger took during the depths of the recession were short-lived and profit growth since has been impressive.

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GWW EBITDA TTM Chart

A big driver of recent growth has been online sales. Grainger management says the online segment is growing twice as fast as the rest of the business and is the most profitable business segment. Online accounted for 25% of sales in 2010 and is estimated to account for 31% for 2012. The company estimates online sales could reach 40%-50% of its total haul by 2015. In a recent analyst presentation Grainger said its monthly web traffic in early fall was about 10x that of Amazon Supply.

There is a catch here. C’mon you knew there had to be. Grainger is not cheap. Its current PE ratio near 22 is a 10-year high, and well above the 14 for the S&P 500 index.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.


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