1 Really Cheap Dividend Stock with 25.2% Upside
Dollar General has underperformed the market by 69% this year, posting a year-to-date loss of 53% but perhaps the decline has provided value investors with a new opportunity now that the price-to-earnings ratio is just 11.7x, almost half the multiple of the S&P 500.
Key Points
- Dollar General’s recent poor performance is largely attributed to its slowing sales growth and subsequent downward revisions in growth forecasts.
- Despite facing headwinds, Dollar General retains a significant competitive advantage or “moat” in the retail sector. Much like Walmart, its scale allows it to negotiate lower prices from suppliers.
- The stock has a P/E ratio of just 11.7x, significantly lower than the S&P 500, and is projected to have a 25.2% upside to $144 per share.
A Tale of Two Quarters
In the past 8 quarters, revenues have climbed and they are up in 10 of the past 12 quarters too, so why the dramatic underperformance? The reason is that sales growth has decelerated from 17.9% three quarters ago to 6.8% two quarters ago and finally to just 3.9% in the past quarter.
Accompanying slower top line growth is operating income going backwards from $933 million to $740 million to $692 million over that same time period.
In addition, the company cut its growth forecasts, not once, but twice. It initially projected a net sales growth rate of between 5.5%-6% for the current fiscal year. Then in June, it adjusted that to a more modest 5% maximum. Now, the high-end of the latest projection is just above 3%.
A primary reason for the forecast adjustments originates from the company miscalculating the logistical challenges of moving excess inventory, which investors worry will trigger aggressive clearance strategies that will further hurt margins.
DG Has a Moat
In the ultra-competitive retail sector, having a sustainable advantage is crucial and Dollar General’s scale has afforded it a moat similar to that of Walmart: it can procure goods at lower prices by negotiating with suppliers.
A primary cost DG incurs is from paying rent and there, too, it has a cost advantage by primarily focusing outside of urban areas where rents are lower.
Those advantages are among the reasons why market analysts remain optimistic, expecting sales to climb by another $1 billion to $10.5 billion over the next couple of years by expanding its store count another 5% or so to around 20,000.
Attractive Dividend
Perhaps most attractive of all is the company’s 2.14% dividend and 23.2% payout ratio, offering management an abundance of opportunity and room to increase it over time.
Investors can also cling to a valuation argument that implies Dollar General has 25.2% upside to $144 per share at this time.
Time to Buy on the Dip?
Dollar General is in the doldrums right now, but it’s by no means a lost cause. It still plans to open almost 1,000 new stores, and Wall Street sees healthy gains in the future.
Add to that a compelling valuation and a solid dividend, as well as a low P/E multiple, and this could be a prime opportunity for savvy investors who have the patience to ride out the storm.
