Being in the right place at the right time can be rewarding, especially when it comes to investing.

Being in the right asset class, the right country or even the right sector when they are in favor can pay off big time and boost your portfolio’s returns. It’s difficult to time the market, so I look for industry leaders that reward shareholders year after year.

One of the sectors that can give investors trouble is the industrial sector, which often lives and dies by the overall health of the global economy. When times are good, manufacturing takes off, but when things slow down, the sector can experience difficult times. Just ask shareholders of companies such as Caterpillar (NYSE: CAT), Boeing (NYSE: BA), or Precision Castparts (NYSE: PCP) who have seen a roller-coaster ride during the past five years.

For another example, take a look at the Vanguard Industrials Exchange-Traded Fund (NYSE: EXI) since 2007:

One of the ways I like to play this volatile sector is through industrial distributors. The industrial distribution industry is highly fragmented, with the top 50 distributors representing about 30% of the roughly $140 billion North American market.

In this highly competitive field, one company in particular is worth a closer look. This company is growing at a 10% rate and is poised to generate impressive returns for the foreseeable future. It has also raised its dividend 41 straight years, offering a great blend of growth and income with less volatility than most stocks in the industrial sector.

Since 1927, W.W. Grainger (NYSE: GWW) has been an industrial distributor of maintenance, repair and operations supplies for businesses and institutions primarily in the U.S. and Canada. Grainger helps more than 2 million businesses in 157 countries by providing the right products to keep their facilities up and running. The company works with more than 3,500 suppliers to provide customers access to more than 1 million products, from adhesives and fasteners to hand tools and office furniture.#-ad_banner-#

Through increasing its product offerings and scale, Grainger has been able to offset cost inflation by expanding its gross margins from 32% in 2002 to 43.8% in 2012. The company can boast 17% returns on invested capital for the past 15 years, while many of its competitors have been in single digits. Because Grainger is the largest customer for seven of its 10 largest suppliers, margins should continue to expand.

One of the ways Grainger has been able to stand out is by aggregating demand on a national level. This enables manufacturers to operate closer to optimal utilization levels and minimize inventory risk. Manufacturers prefer partners like Grainger because they perform the selling functions for suppliers which then have to spend less on marketing and sales. Grainger also has a competitive advantage by upselling its services beyond inventory supply.

At its current pace, Grainger could go from the $9 billion in revenue it posted last year to $18 billion by 2022. With an annual growth rate in excess of 10%, Grainger should be able to boost its North American sales and also expand internationally.

Take a look at Grainger since 2009: 

Grainger is in solid financial shape with more than $486 million in cash and modest leverage at a 15% debt-to-capital ratio. It recently reported record earnings per share of $2.94 for its 2013 first quarter. Operating margins increased 1.2 percentage points to 15.1%, its highest quarterly level since 2006.

Management forecasts 2013 sales growth of 5% to 9%, with earnings per share between $11.30 to $12.

Risks to consider: Industrial distributors have not been able to gain much of a foothold in emerging markets. Although Grainger has a presence in places such as India and China, its international growth has not been impressive. If manufacturers move more production overseas, this could impair Grainger’s profitability. Additionally, about 70% of Grainger’s sales volume is shipped to customers based on a requisition order, not in-store purchases. This allows its customers to comparison-shop and limits Grainger’s ability to raise prices.

Action to take –> Grainger is a good buy at up to $255 a share. It pays a 1.5% dividend yield, which amounts to about $3.20 a share, and has raised its dividend every year since 1972. My target sell price is $325, representing 35% upside during the next 12 to 18 months.

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