MSC Industrial Direct is a dividend achiever with a 16-year track record of annual dividend increases. The last dividend increase occurred in July 2019, when the company raised its dividend by 19% to 75 cents/share. Two of MSC Industrial Direct’s competitors include W.W. Grainger (GWW) and Fastenal (FAST).
The company has managed to grow earnings per share at a decent clip over the past decade. Earnings per share went up from $3.05 in 2008 to $5.80 in 2018. The company is expected to earn $5.24/share in 2019. I like the consistency of earnings per share over the past decade.
A large part of growth over the past decade was accomplished through acquisitions. However, they have not always added directly to the bottom line. However, they have increased the company’s scale, and diversified operations into new end markets. A big jump in earnings per share occurred in 2018, after corporate tax rates were lowered, which resulted in higher earnings per share. A potential area of growth include international operations, with MSC recently creating a partnership in Mexico. MSC Direct has some operations in the UK and Canada, which could be opportunities for future development as well.
MSC Direct can take market share from smaller competitors, as it offers better pricing and better variety of SKUs to clients. In addition, it tries to integrate in client operations. Some examples include providing of inventory management solutions to customers, performing the procurement process for customers, keeping inventory at the client locations. This creates stickier relationships with the customers. MSC Direct also has industry specialists to provide clients with process improvement and efficiency initiatives, and assist with technical issues.
While the business is very competitive, and has grown through acquisitions, the possibility that the company gets acquired by one of its larger peers is low. That’s because a large portion of the voting power (and ownership as well) with consolidated by the Jacobsen family, which has founded and operates the business. On the other hand, this could be a blessing, because the ruling family could operate with a focus on long-term lasting and sustainable growth. It is generally good to have management whose incentives are aligned with the long-term well being of the business.
As usual, Amazon is a potential threat for companies like MSC Direct. However, it can differentiate itself by offering a focused set of solutions to its clients. Specialization is a competitive advantage to a certain degree, versus a competitor that is large, but is becoming a jack of all trades. MSC Direct also has 99% of the SKUs offered in stock, and offers one day delivery to clients. Although the barriers of entry in competing with the likes of MSC direct are low, it takes some time to build the relationships with customers.
At the same time, shares outstanding remained at around 63 million between 2008 and 2013. Only since 2014 did MSC Industrial Direct start to do some share buybacks, though at a very slow pace.
Over the past decade, the company has managed to grow dividends at an annual rate of 12%/year. This is faster than the growth in earnings per share. I would expect that future dividend growth over the next decade will be closer to 7%/year.
An interesting fact about the company is that it has tended to issue special dividends to shareholders on a few occasions. The last one was a $3/share special dividend in 2015, preceded by a $1/share special dividend in 2011. The first special dividend of $1.50/share was declared and paid in 2005. The company has as shareholder friendly capital allocation strategy, which grows the business while also sending more cash to shareholders in the form of dividends, special dividends and share buybacks.
The dividend payout ratio grew from 24% in 2008 to 38% in 2018. This was possible due to the fact that dividends grew faster than earnings per share. That being said, there is still room for slightly faster growth in dividend payments over earnings.
Right now, the stock seems attractively valued at 13.60 times forward earnings and yields 4.20%. This investment idea for further research was first featured in the Dividend Growth Investor Newsletter.
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