Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



These 2 Dollar Stores Are as Cheap as Their Products

In a stock market lacking in value opportunities, two dollar store chains appear to be as cheap as their goods. Those two are Dollar General (NYSE: DG  ) and Dollar Tree (NASDAQ: DLTR  ) which both hold compelling valuations, especially considering their growth opportunities and cash flow generation abilities. Cash-strapped consumers continue to pinch pennies and are scaling down their shopping habits. For better or worse, this means that well-run dollar stores in the United States, such as Dollar General and Dollar Tree, are in great shape.

Even better, both stocks are trading for reasonable valuations, even while the stock market keeps racing to new highs. If you're on the hunt for growth stocks trading for modest valuations, you should seriously consider Dollar General or Dollar Tree.

Growth at a reasonable price
Both Dollar General and Dollar Tree are doing well, even in a tough operating climate for retail. The brutal winter weather took a severe bite out of economic growth in the last two quarters, but both Dollar General and Dollar Tree weathered the storm. In addition, the dollar store industry more broadly is an intense competitive environment right now, one in which rivals are busily trying to outdo one another on price cuts.

Despite these headwinds, Dollar General and Dollar Tree are still growing. In the most recent quarter, Dollar General's same-store sales in the fourth quarter rose 1.3%, which isn't spectacular growth but is impressive in light of the tough operating climate. The previous quarter was even better, with same-store sales and earnings growth coming in at 4.4% and 10.5%, respectively. For the year, Dollar General racked up 3.3% same-store sales growth and 10% earnings growth. Dollar Tree is doing equally well right now. In each of the last two years, Dollar Tree has grown same-store sales by 2.4% and 3.4%.

Because of solid sales growth, both companies are pursuing an aggressive expansion strategy to keep growth going in the future. Dollar General opened 650 new stores last year and plans to open 700 additional stores in 2014. Dollar Tree opened 51 stores in the fourth quarter and intends to expand total square footage by 7% this year.

Compelling cash returns
Neither Dollar General nor Dollar Tree pays a dividend to shareholders, but that doesn't mean investors aren't getting their fair share of cash. Management teams of both companies prefer to reward shareholders in the form of share buybacks, which have effectively reduced share counts in both cases.

When employed effectively, meaning utilized to truly reduce shares outstanding instead of rewarding executives with option grants, share buybacks can be extremely valuable. That's the case when it comes to the share buyback programs for both Dollar General and Dollar Tree.

Dollar General spent more than $620 million repurchasing shares last year, and the results speak for themselves. Its diluted earnings per share clocked in at $3.17, which represents 43% growth in just two years.

At the end of fiscal 2014, Dollar Tree had 219 million shares outstanding. This is a 10% reduction in shares outstanding in just two years, from more than 242 million shares outstanding at the end of fiscal 2012. This was a primary contributor for diluted earnings per share increasing 35% in that time.

The Foolish takeaway
The aggressive share buyback strategy employed by both Dollar General and Dollar Tree have proven to be extremely accretive to shareholders. This is especially true now, since both stocks trade for relatively low valuations. Both stocks trade at or below 18 times earnings, which means that their share repurchases will be even more valuable to shareholders at such low valuations. This will help boost earnings per share even more going forward.

While overall economic growth remains tepid, dollar store chains are reaping the rewards. For better or worse, consumers are ratcheting down their spending habits, and are increasingly opting for dollar stores. If you're looking for stocks that demonstrate growth at a reasonable price, look no further than Dollar General and Dollar Tree.

Will the dollar stores ever pay dividends?
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2942140, ~/Articles/ArticleHandler.aspx, 9/3/2015 11:46:45 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

Today's Market

updated 2 hours ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:00 PM
DG $72.16 Down -0.09 -0.12%
Dollar General CAPS Rating: ***
DLTR $67.00 Down -0.59 -0.87%
Dollar Tree Stores CAPS Rating: ***