This Dividend Aristocrat Keeps Humming Along, Despite Trade Volatility

As the trade war between the U.S. and China heats up, with few signs of either side backing down, volatility has gripped the stock market. In times of heightened volatility, investors can turn to high-quality dividend stocks for consistent profits and reliable dividends. The Dividend Aristocrats are an exclusive group of stocks in the S&P 500 Index, with more than 25 consecutive years of dividend increases. These stocks have survived recessions and periods of elevated geopolitical tensions, while continuing to raise dividends each year. W.W. Grainger is a Dividend Aristocrat that has increased its dividend for 48 consecutive years. It raised its dividend by 6% earlier this year, along with a new share buyback. The company's continued growth throughout 2019 fuels its impressive cash returns, despite the challenge presented by the trade war. This makes Grainger a long-term buy for dividend growth investors. Navigating The Trade War W.W. Grainger is one of the world's largest business-to-business distributors of maintenance, repair, and operations (MRO) supplies. The company was founded in 1927 and generates sales of approximately $11 billion per year. W.W. Grainger trades with a market capitalization of over $14 billion. The company reported its second-quarter earnings results on July 24, showing it generated revenue of $2.9 billion during the quarter. This represents revenue growth of 1%, compared with the prior year's quarter. Excluding the negative impact of currency fluctuations, W.W. Grainger's revenue was an even better 2% year-over-year. Earnings-per-share growth was even stronger than revenue growth, through the impact of operating leverage. The company lowered operating expenses compared to the prior year's quarter, which allowed it to grow its operating margin to 13%, up 50 basis points vs. the previous year's comparable quarter. Margin expansion led to 5% growth in adjusted operating earnings last quarter. Share repurchases provided a final boost to the company's earnings per share last quarter. W.W. Grainger grew its adjusted earnings-per-share to $4.64 during the second quarter, which was 6% growth from the same quarter last year. The trade war has affected many industrial supply firms, but W.W. Grainger continues to execute on its growth priorities. W.W. expects 2019 net sales growth of 2% to 5%, along with estimated earnings-per-share range of $17.10 to $18.70 for the year. At the midpoint of the earnings-per-share guidance range, W.W. Grainger would grow its earnings per share by 7%. Future Growth Potential W.W. Grainger grew its earnings-per-share by approximately 14% annually between 2009 and 2018, in the years after the financial crisis. Backing out the positive one-time impact of a lower tax rate that led to outsized earnings-per-share growth during 2018, the average growth rate declines to 7% per year. Still, a high-single digit EPS growth rate is a satisfactory growth level for a mature company. W.W. Grainger has continued to grow its earnings per share this year, even in a difficult environment with macroeconomic concerns. W.W. Grainger's strategic shift of lowering its pricing, thereby creating higher demand and growing its revenue, has worked well over the past year. We believe that growth will moderate somewhat, given the trade war and global economic slowdown, but W.W. Grainger should nevertheless be able to grow its sales as well as its profits in the coming years. We expect the long-term earnings-per-share growth rate to be in the 6%-7% range per year. Profit growth will not only be driven by rising revenue, but also by a reduction in the company's share count. Compelling Cash Returns W.W. Grainger remains a highly profitable and growing company, even during the trade war over the past several months. This means it can easily afford to return even more cash to shareholders. W.W. Grainger is a very shareholder-friendly company, as it returns excess cash to shareholders every year through dividends and share repurchases. Over the past five years, W.W. Grainger has reduced the number of shares outstanding by more than 15%. In all, it has returned approximately $5.4 billion to shareholders through share repurchases and dividends. In April 2019, W.W. Grainger raised its quarterly dividend by 6% to $1.44. On an annualized basis, the dividend rate of $5.76 represents a yield of 2.2%. This exceeds the average yield of the broader S&P 500 Index, currently around 1.9%. Along with the dividend increase, W.W. Grainger approved a new share buyback of up to 5 million of its common shares. This represents roughly 9% of the company's current 55.4 million shares outstanding reported at the end of the most recent quarter. As a result, all else being equal, the 5 million repurchase could increase EPS by 9% over the course of the buyback. Valuation & Expected Returns Based on expected 2019 earnings per share of $17.90, W.W. Grainger stock trades for a price-to-earnings ratio of 14.8, a reasonable valuation for a highly profitable Dividend Aristocrat. W.W. Grainger stock could be considered undervalued, given its strong business model and long history of growth. For example, a price-to-earnings ratio of 16 would boost annual returns by 1.6% per year over the next five years. In addition, shareholder returns will be fueled by EPS growth and dividends. If W.W. Grainger grows EPS in the 6%-7% range each year, plus its 2.2% dividend yield, total returns would exceed 10% per year, over the next five years. This is a highly attractive rate of return for this quality Dividend Aristocrat. No Fireworks, Just Solid Business W.W. Grainger is not active in a spectacular or high-tech industry, but the services that the company provides are essential for other businesses. This makes W.W. Grainger's business relatively immune to recessions and economic downturns, as its business is not overly cyclical. W.W. Grainger is a company that is active in a fairly unspectacular industry, but nevertheless has achieved a strong earnings and dividend growth track record for many years. Over the next five years, we estimate total returns above 10% per year for the stock, making the stock an attractive pick for dividend growth investors.

This Dividend Aristocrat Keeps Humming Along, Despite Trade Volatility

W.W. Grainger remains a highly profitable and growing company, even during the tariff spat with China, and is expected to offer big returns to shareholders.

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