The upcoming stock analysis is about a company, which is on its way to be a part of the dividend kings. It increased its dividend for 45 years and recently announced another increase of 24 cents per share. It is about the electronic wholesaler W.W. Grainger, which experienced quite a decline in the last couple of months.

Company Overview

W.W. Grainger (GWW) engages in the distribution of maintenance, repair, and operating supplies, as well as other related products and services for businesses and institutions primarily in the United States and Canada. It operates in the United States, Canada, Japan, Mexico, India, Puerto Rico, China, Colombia, Panama, and the Dominican Republic. The company was founded in 1927 and currently pays an annual dividend of 5.12 USD per share.

Valuation

Currently GWW is pricedat 179.32 USD per share.

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If I take the weighted average of the 4 ratios according to the 5year average the price would be at 221.13 USD. That means the current price is 18.9% below its 5 year average. The 5 year high was at 270.15 USD, which was about 3.5 years ago, so currently the stock trades 33.6% below its 5-year high.

The fair market value ratio of the industrial distributor sector, according to morningstar is currently at 0.96. If I divide the current price by it I will get a price of 186.79 USD.

Earnings per share growth

In 2011 the EPS were at 9.07 USD and EPS in 2016 were at 9.87 USD. This makes it an average growth per year of 1.70%.This does not look so impressive but taking to account that from 2015 to 2016 was the only decline in EPS in the last 10 years the overall trend looks much better. In the last than 10 years GWW almost doubled their EPS from 4.94 USD in 2007 to 9.87 USD in 2017.

Dividend History and Future

GWW has an impressive dividend history with increasing the dividend for 45 years in a row. In the last 5 years, the average growth per year is 13.90% based on a dividend of 2.52 USD in 2011 and a current full year one of 4.83 USD.Even though the dividend is already on a very high level the pay out ratio is still on a reasonable level

An important point for my buying decision is as well the dividend yield on cost, which is currently at 2.86% based on the new yearly dividend of 5.12 USD. After tax my minimum yield, I want to reach within the next 3 years, should be at 2.8%. This means it should have a yield of 3.9% before tax.

Assuming now a dividend growth rate of 10.0% per year the dividend in 2020 will be at 6.81 USD, which means a yield on costs of 3.80% before tax.

What does the fair value calculation according to finbox.io says?

According to finbox the fair value would be at 215.77 USD that means with the current share price the stock seems to be undervalued and that there is still some upside potential. All in all the upside potential would be 19.2%.

How much income would I generate with GWW?

Let’s have a look how much additional dividend income I get if I will buy 15 shares of GWW.

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As you can see the income will look very good and the yield on cost will be at my goal of more than 2.8% in 2020. That means in 3 years, which is in line with target of 3 years. I am assuming an optimistic dividend growth rate of 10 % per year, as I think the pay out ratio leaves enough room for further growth.

Conclusion

I think the current decline of GWW offers a good opportunity to add this company to the portfolio. The decline in the stock price for me is a typical market overreaction but I think it is not really over yet. Personally I guess there will be a further decline to around 160 USD, which will be also my entry point. The company itself offers a very good dividend growth history and also a very reasonable pay out ratio. All in all the stock will be on my closer watch list and potential buys in the upcoming months.

What do you think about GWW? Do you already have it in your portfolio or would you buy it at its current price?