MSC Industrial: Uninterrupted Dividends Since 2003

MSC Industrial's roots trace back to 1941 when founder Sid Jacobson began selling cutting tools from the trunk of his car. Today, MSC is one of the largest North American distributors of metalworking and maintenance, repair, and operations (MRO) products.

The company works with thousands of suppliers to source around 2 million products, such as cutting tools, measuring instruments, fasteners, janitorial supplies, and power tools. MSC also provides inventory management and other services.
Source: MSC Industrial Investor Presentation
MSC serves manufacturers of all sizes, including individual machine shops and Fortune 1000 companies. Most of its revenue comes from manufacturing customers, including automotive, oil and gas, aerospace, and metal fabrication businesses.

These companies and many other industrial businesses have an ongoing need for MSC's timeless products and services.

Working with multiple suppliers, tracking inventory, placing accurate orders, making costly one-off purchases, and storing products are all pain points MSC helps alleviate. Many of the firm's customers lack the resources to effectively manage and monitor their MRO inventories.

As one of the more prominent players in this highly fragmented industry, MSC's scale also gives it a leg up against local and regional distributors. Smaller rivals cannot match MSC's breadth of inventory, speedy fulfillment of orders (same-day and next-day delivery), competitive cost structure, or investments to support convenient online ordering.

MSC further differentiates itself by being a leading distributor of metalworking products. The company's nationwide team of metalworking specialists works with customers to help them select the right tools, optimize tool life, and use the proper machining process to maximize quality and productivity.

This strategy helps MSC become a mission-critical partner on the plant floor rather than needing to compete primarily on price as a spot provider of commoditized supplies.

That said, the industry is highly competitive, with well over 100,000 distributors in North America. Competitive intensity is especially high when industrial activity slows, which causes smaller distributors to use price as a lever to retain accounts.

The rise of e-commerce has also increased price transparency and allowed non-traditional competitors such as Amazon to enter certain markets, making it harder for some distributors to hold their margins.

MSC has not been immune from these trends, but they haven't stopped the firm from paying uninterrupted dividends since 2003. This track record reflects MSC's consistent free cash flow generation and conservative use of debt.

It doesn't hurt that the founding family still controls the majority of the voting power and presumably enjoys receiving their dividends, too.

Looking ahead, MSC could have a long runway for growth since it has less than a 2% share of the North American industrial distribution market. Smaller players unable to make necessary investments in inventory and e-commerce may be forced to consolidate, allowing other distributors to expand their territories.

Profitable growth is still challenging in this cutthroat industry, but MSC's longstanding customer relationships, niche focus on metalworking, timeless products, and financial discipline should ensure it remains relevant for years.

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