The company’s latest dividend increase was announced in February 2014 when the Board of Directors approved a 19.10% increase in the quarterly dividend to 31 cents /share. The company’s peer group includes Dollar General (DG), Dollar Tree (DLTR), and Wal-Mart Stores (WMT).
Over the past decade this dividend growth stock has delivered an annualized total return of 6.60% to its shareholders.
The company has managed to deliver a 10.40% average increase in annual EPS over the past decade. Family Dollar is expected to earn $3.15 per share in 2014 and $3.51 per share in 2015. In comparison, the company earned $3.83/share in 2013.
Family Dollar has a record of consistent share repurchases. Between 2004 and 2014, the number of shares decreased from 172 million to 115 million.
Future earnings per share growth will come from new store openings, same store sales growth, streamlining costs and reducing the number of shares outstanding. The big risk is the fact that there are so many dollar stores in the US, that future growth will likely hit a roadblock in the next five – ten years. In addition, a potential entry by Wal-Mart in the dollar store space could be detrimental for companies like Family Dollar.
The company recently announced it will close 370 underperforming stores in 2014. However, it also plans to increase number of stores by 525, which would still result in a net addition to store count. In addition, if you reduce number of locations where you are losing money, your bottom line would increase overall. Therefore, I do not think that this is such bad news after all. In addition, the company plans to slow down the number of store openings to 350- 400 in 2015, which is still close to a 4 – 5% growth in number of stores.
Given current store counts of about 8,000 locations, this could translate into store counts doubling in 20 years. The company is usually having stores in small towns, and those locations are usually viewed as a convenience neighborhood mart for shoppers. Its consumers are usually female, earnings less than $30,000/year, and 40% are relying on government assistance. I think that the proximity of Family Dollar stores is one of the factors that can result in repeating sales, and converting those customers into loyal followers. Family Dollar Stores has also managed to increase the variety of foods, including refrigerated ones, and qualify for inclusion in the food stamp program. Family Dollar’s limited time offerings also create excitement for consumers, and differentiates the chain from its competitors. In addition, it is increasingly accepting credit cards in its stores, which creates convenience for its customers.
The annual dividend payment has increased by 13.60% per year over the past decade, which is higher than the growth in EPS.
A 13.60% growth in distributions translates into the dividend payment doubling every five years on average. If we check the dividend history, going as far back as 1985, we could see that Family Dollar has actually managed to double dividends every six years on average.
The dividend payout ratio has increased slightly from 21% in 2004 to under 25% by 2013. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
The return on equity has been on a rise from 19.70% in 2004 to 30.60% in 2013. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Currently, the stock is attractively valued, as it trades at a forward P/E of 17.10 and yields 2.20%. For the first six years of my dividend growth journey, I used Family Dollar as an example of a good company which was always above my buy price. Now, I would view it as a buy on dips below $50/share. However, I think growth is slowing down, there will be new pressures on the sector. As a result, I might only add there if I am out of other ideas at the time cash is available for investment.
Full Disclosure: Long FDO, WMT
Relevant Articles:
- Dividend Champions - The Best List for Dividend Investors
- How to invest for dividends when markets are overvalued
- Types of dividend growth stocks
- Why do I own so many individual dividend paying stocks
- Should Dividend Investors Ever Break Their Rules?