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While the Market Is in Turmoil, Buy More of This Stock

By Jon Quast – Sep 23, 2020 at 9:30AM

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If you're looking for a business that thrives whether the economy is good or bad, makes good use of cash, and rewards shareholders, then this is the stock for you.

In late February and March, the S&P 500 index fell over 30%. The market crash was fast, furious, and discombobulating. In their heads, experienced investors understood this was probably a great buying opportunity since stocks have always rebounded after crashes. But the COVID-19 pandemic made the crash of 2020 feel different.

Things still feel different. How are investors supposed to make sense of an ongoing health crisis, a U.S. presidential election whose candidates have very different economic policies, high unemployment with the threat of future layoffs, and unprecedented government economic stimulus? One thing you can do is make a list of stocks to buy if the market crashes again.

In hindsight, I can't believe I didn't think to buy Dollar General (DG 0.02%) stock in March when the market was in turmoil. But that's what turmoil does; it robs our ability to think clearly. That's why it's a good idea to have a plan in place before the market falls.

Wooden blocks with letters changing the word from panic to calm.

Image source: Getty Images.

Dollar General has proven it's not beholden to a certain economic situation. It's a steady performer, making it a good pick in uncertain times. And it still offers market-beating potential. The stock is so steady that its 15% drop in March was one of its sharpest pullbacks in a decade. It is currently trading up about 33.6% year to date and about 66.7% from its March lows.

Here are three reasons why you should consider buying Dollar General stock if the market crashes again.

1. Non-stop comp-sales growth

For Dollar General, comparable sales measures sales at stores open at least 13 months. It's helpful because it shows sales trends once a location matures. By contrast, short-term sales metrics could be misleading. Sales could be low because shoppers don't know a store is open yet, or sales could be high because of opening-day excitement.

Dollar General's comp-sales have grown for 30 consecutive years. In other words, President Bush (the elder) was in office the last time comparable sales didn't go up. Since then, we've had recessions, wars, and natural disasters -- even a global pandemic. But Dollar General's sales just keep climbing higher with each passing year.

In the first two quarters of 2020, Dollar General's comp-sales are up 20.2% total. This is incredible double-digit growth during the COVID-19 lockdown, showing just how strong this business is during down times.

However, to be clear, Dollar General doesn't need a pandemic in order to thrive. It's performed well in the worst of times, yes. But there has also been historic economic prosperity during the past three decades. Dollar General does just fine whether the economy is good or bad.

2. New store payback period

In a 2016 investor-day presentation, Dollar General management presented two astounding statistics. New stores are cash-flow positive after one year. And the store payback period (the time to pay off the new location cost) is less than two years. We might joke about Dollar General stores popping up in every empty field across America, but these two statistics demonstrate opening new locations is a brilliant use of cash.

There are 16,720 Dollar General stores as of the second quarter of 2020. How many could there be? Well, back in 2016 (when it had 13,320 locations) the company had identified over 13,000 places to open new stores. This means it can still open almost 10,000 more locations just from what it's already identified. But it's possible the potential extends further than these.

3. Dividend growth

Dollar General is an under-appreciated, long-term dividend stock. Dividend investors typically search for high-yield dividends -- more than a 2% immediate return on their investment. Dollar General's dividend yield is below 1%, which means it's overlooked.

DG Dividend Chart

DG Dividend data by YCharts

However, Dollar General spends very little on its dividend; most of its cash is better spent growing the business, as we just noted in the previous section. A payout ratio refers to how much of a company's earnings-per-share (EPS) are paid out as a dividend. Dollar General's payout ratio is incredibly low at just 15%.

Because the payout ratio is so low, there's plenty of room for dividend growth. Dollar General has raised its dividend payout by 12%, 10%, and 13% over the past three years. At this pace, the dividend will double over the next six to seven years. 

In other words, for patient investors, Dollar General's dividend will grow at an above-average pace. And it has the advantage of not being a pure dividend play: This company is actively growing its business -- growth that could perhaps even make it a millionaire-maker stock. Investing today gives you both growth and a dividend, all with the peace of mind that a steady performer creates. And peace of mind is important, especially when the market is in turmoil. 

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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