The maintenance, repair and operations supply industry doesn't sound like a growth industry.
Supplying parts to fix mechanical and electrical items or supplying various other business products isn't cutting edge.
The company has compounded earnings per share at 12.6% a year over the last decade. Dividends have grown even faster, at 15.5% a year over the same time period.
Strong growth is nothing new to W.W. Grainger. The company has paid increasing dividends for 45 consecutive years. This makes the company one of just 50 Dividend Aristocrats, stocks that have paid dividends for 25-plus consecutive years.
W.W. Grainger, which was founded in 1927, has a $13.97 billion market capitalization. The company is the industry leader in the maintenance, repair and operations supply industry in the U.S.
When a market leader has a very large market share in a slow-growing industry, investors can expect sluggish growth. For example, Coca-ColaKO isn't going to sell too many more Cokes in the U.S. next year than it will this year.
But W.W. Grainger is different. The company is a market leader, but it has just an 8% market share in Canada and a 6% market share in the U.S.
This means that the company has plenty of room to gain market share in its industry in its core markets. And when W.W. Grainger grows, its competitive advantage strengthens.
W.W. Grainger's competitive advantage is a result of its excellent supply chain and scale. As the largest company in the fragmented North American maintenance, repair and operations industry, the company has scale advantages over smaller competitors.
The company has reach over the entire contiguous U.S. This makes the company especially appealing to large, national businesses.
W.W. Grainger has a 14% market share for large businesses or those with 100 or more employees.
The more locations W.W. Grainger opens or acquires and the more distribution centers it has, the stronger its competitive advantage gets as its ability to provide convenient shipping or pick up for items increases.
This makes bolt-on acquisitions especially appealing for W.W. Grainger. And there are plenty of these acquisition opportunities available in its highly fragmented industry.
W.W. Grainger has made the following acquisitions in North America since 2009:
- Safety Solutions in 2013
- E&R Industrial in 2013
- Techni-Tool in 2013
- Parts of Canada's Wolseley Industrial Products in 2010
- North American supplier Safety Certified in 2010
- Canadian supplier Solus Securite in 2010
- North American supplier K&D Pratt's industrial division in 2009
- Alliance Energy Solutions in 2009
- Imperial Supplies in 2009
The company has made the following international acquisitions since 2009:
- U.K. supplier Cromwell for $440 million in 2015
- Dutch supplier Fabory in 2011
- 53% of Japan's MonatoRo in 2009
- Indian supplier Asian Pacific Brands in 2009
What stands out about W.W. Grainger's acquisitions is their timing.
The company gobbled up smaller businesses in 2009 and 2010 when asset prices were depressed. W.W. Grainger's management took full advantage of the Great Recession by buying up businesses when they were cheap.
Aside from the strategic Cromwell acquisition last year, W.W. Grainger has curtailed its acquisition activities as the bull market has raged on and pushed up asset prices. The company will likely get back into acquisition mode during the next protracted recession.
W.W. Grainger's management allocates capital extremely well.
When there are no bargains to be had buying other businesses that will integrate with the business, the company looks to repurchase shares. W.W. Grainger has steeply ramped up share repurchases over the past few years, likely in place of its normal acquisition activity.
Despite long-term strength, W.W. Grainger has struggled recently.
The company's adjusted earnings per share declined 12% in its most recent second quarter from a year earlier. The decline is due to low commodity prices.
Low commodity prices reduce purchases from many of the company's customers in the energy and mining industries.
In total, W.W. Grainger expects EPS growth of -6% to 2% for full-year 2016. This slowdown won't persist indefinitely, and W.W. Grainger should return to growth when commodity prices improve.
What the slowdown has done is given investors a chance to buy into W.W. Grainger shares. The stock trades for a price-earnings ratio of 21.
This is likely fair value for the company, and it reflects W.W. Grainger's long-term-growth potential
W.W. Grainger stock has a dividend yield of 2.1%, with a payout ratio of 42%. The company's reasonable payout ratio makes it highly likely that W.W. Grainger will pay increasing dividends in the future.
The company ranks very well using The 8 Rules of Dividend Investing, due to its strong growth, reasonable valuation and stability. W.W. Grainger makes a compelling investment for investors looking for growth and stability in the maintenance, repair and operations industry.
This article is commentary by an independent contributor. At the time of publication, the author was long GWW.