Retailer Dollar General (DG) suffered a rocky 2015 along with the broader stock market, booking meager 2% gains while the S&P 500 has been flat. But the discount store, which boasts a market cap north of $21 billion and track record of around 75 years, is a tried and true pick that’s sure to begin heading in the right direction again, soon.
Dollar General operates more than 12,000 stores in 43 states, and each location has a mix of well-priced private brands and products from well-known companies such as Clorox (CLX), Coca-Cola (KO), Unilever (UL), General Mills (GIS), and more. While some investors think dollar stores can only flourish in the worst of times, when consumers are dramatically tightening their purse strings, this mix helps make sure shoppers keep coming back, even as the economy recovers.
The proof is in the pudding, too: Annual sales at dollar stores are close to $55 billion, with annual compound growth tallying just under 7% since the turn of the century — chugging higher in good times and bad. Plus, according to Kantar Retail, that momentum should continue, with annual expansion of 6.6% per year through 2020.
That’s good enough to make dollar stores the fastest growing brick-and-mortar channel…and should be good enough to keep Dollar General moving higher, as it’s done in recent years. DG stock was worth just over $20 at that time and is worth more than $70 now. Meanwhile, revenue has expanded every year since 2003, more than tripling from $6.1 billion that year to $18.9 billion last year.
DG Has Solid Fundamentals
Looking forward, sales are slated to expand by more than 7% for 2015 to tally $20.4 billion — then add another 8% growth in 2016. Even better is the trickle-down on tap, with earnings expected to grow 12% this year, almost 15% in 2016, and average 15% growth over the coming half-decade.
It’s no wonder analysts — who have underestimated the company on the earnings front for the last three quarters — see more upside for Dollar General stock. The average price target of $82 represents 12% gains for DG stock, a climb that seems easily attainable.
The cherry on top of Dollar General is its dividend. While the yield in a bubble isn’t mind-blowing, it comes with strong fundamentals and industry tailwinds. Dollar General just recently started shelling out quarterly payments, and the 22 cents that come every three months are good for a yield north of 1.2%.
That payment also represents a payout ratio of less than 18%, which — especially when combined with the company’s strong free cash flow — suggests plenty of room for growth. The company is also keeping shareholders front and center via share buybacks. As of the most recent quarter, Dollar General had returned $1.2 billion to shareholders through share repurchases and dividends, on top of announcing an incremental $1 billion share repurchase authorization.
Add it up, and there’s little reason to think the end is in sight for Dollar General. This year wasn’t particularly impressive, but that’s good news for investors seeking a reasonable entry point for a tried and true, but still-growing, retail pick.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
