Dollar General Corp. (NYSE:DG) has had a rough go of it this quarter. It lost its bid for Family Dollar Stores, Inc. (NYSE:FDO) to Dollar Tree, Inc (NASDAQ:DLTR), and had to take a back seat in general to news of Wal-Mart Stores, Inc (NYSE:WMT) wage increases and even Target Corporation (NYSE:TGT) plans for smaller discount stores.
As we await Dollar General earnings on Thursday, investors counting on DG to outperform should keep an eye on these three things in particular as factors for DG stock momentum.
Prices, Wages and Jobs to Boost DG Stock
DG stock seeks to benefit across the board from lowered prices, higher minimum wages and the added jobs to the economy.
Dollar General has a price-to-sales ratio of 1.2 trailing 12 months. Despite losing out to Dollar Tree for the purchase of Family Dollar, DG still has plenty going for it.
Dollar General caters to lower-income consumers whose spending power suffers more from high prices at the pump than higher-income shoppers do. Lucky for DG stock, the U.S. doesn’t have enough room to store its crude oil, which could drive oil and gas prices down further.
Why? Well, it seems the U.S. is both producing and importing more than it can consume. At this rate, we could see storage tanks reaching their zenith in April, effectively pushing the price of gas down further.
What’s more, the U.S. payroll report showed employers added 295,000 new jobs in February, higher than the expected 240,000 jobs. Despite WMT raising its minimum wage, wage growth is moving at a snail’s pace. More jobs, however, coupled with the 1.2% decrease in unemployment, should act as adrenaline to DG stock when Dollar General earnings are reported.
Competition from Walmart Stores, Inc. (WMT)
On the one hand, we have Wal-Mart continuing to shutter its discount stores in a bid to horn in on DG’s demographic by increasing WMT Neighborhood Markets and Walmart Express stores, which WMT has recently opened at the same rate as its Supercenters.
On the other hand, shareholders need not sell off DG stock in a panic. DG stock has plenty of stomping room itself and here’s why:
- The revenue is there (sales are twice that of the discount store industry)
- Profits are skyrocketing (gross profit margin is 30% to the discount industry’s 24%)
- Future forecasts are promising (price-to-earnings ratio five-year high halves the industry’s five-year high)
Lastly, WMT’s recent minimum wage hike will cost WMT a lot of money, while those workers are likely to spend their extra earnings at a discount store more like Dollar General.
Depend on DG Stock Dividends
When Dollar General hoped to acquire Family Dollar, DG claimed it would keep up FDO’s dividend payments, despite DG not paying one itself. Should Dollar General finally offer its shareholders a dividend? Let’s look at the figures:
DG has a free cash flow of $674.6 million (which it consistently grew over the last five years); meaning if Dollar General decides to spend, I don’t know, $300 million on annual dividends, it’s still less than half of its free cash flow. There are more than 300 million shares in DG stock and DG has an EPS estimate of $4, putting Dollar General profits at approximately $1.2 billion mark. That allows Dollar General to pay an annual dividend of $1 per share at a a very sustainable dividend payout ratio of 25%.
To back it up, if anything ever went sour with Dollar General’s cash flow, DG also maintains a reasonable $500 million horde in cash and short-term investments.
When considering DG as a stock to buy, look for that dividend announcement in DG’s earnings report.
