W.W. Grainger: Delivering Performance

These days, Chicago distributor W.W. Grainger is doling out more than just industrial and office supplies. Thanks to its growing number of facilities and improved operating efficiency, Grainger (symbol GWW) has also been delivering strong financial performance and a steady stream of dividend increases. In 2005, earnings per share grew to $3.78, up 21% over 2004. Revenues grew 9%, to $5.5 billion. In 2006, the company expects earnings of $4.00 to $4.15 per share.

Grainger deals in everything from electric motors and air compressors to janitorial supplies. Customers, which include manufacturers, industrial maintenance operations, and hotels, can buy products through one of Grainger's 600 branches (which offer pick-up and delivery), or can shop via catalogue or the Internet.

To increase efficiency and its presence in major cities, the company has been building new distribution centers. These facilities can ship catalog orders directly to customers, skipping over branch stores and saving delivery time. Grainger has also been expanding existing warehouses and steering routine traffic toward Internet orders, which tend to have larger average ticket sizes.

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Grainger has little debt and a healthy cash reserve, which allows it to return money to shareholders. For 34 consecutive years, the company has increased its dividend payments, including a 20% boost in May 2005, to $0.24 quarterly. Analysts at Standard Poor's predict that Grainger will repurchase $150 million to $200 million in stock in 2006, and increase dividend payments by 5% to 10%. SP also expects Grainger to generate at least $300 million of free cash cash flow in 2006. SP gives Grainger's shares its highest, five-star rating.

The stock, at $74, trades at 18 times analysts' 2006 earnings estimates of $4.15 per share, according to Thomson First Call.

--Katy Marquardt