Investing in companies with reliable businesses is essential in an economic environment fraught with uncertainty.
Catering to the needs of ranchers, recreational farmers, and everyone that enjoys the rural way of life, Tractor Supply (TSCO 2.20%) is the largest retailer in its niche. Needless to say, this builds in competitive advantages for the company. Is the stock a buy for growth and dividend investors? Let's dig into Tractor Supply's fundamentals and valuation to find out.
Steady as they come
In late July, Tractor Supply shared its financial results for the second quarter ended June 25. The company once again beat the analyst consensus for net sales and diluted earnings per share (EPS) during the quarter.
Tractor Supply reported $3.9 billion in net sales in the second quarter, an 8.4% growth rate over the year-ago period. This was just above the average analyst net sales estimate of $3.9 billion (rounded). How did the company match or surpass the analyst net sales consensus for the 10th quarter out of the last 10 quarters?
Tractor Supply posted 5.5% comparable-store sales growth in the second quarter. Thanks to price hikes stemming from inflation, the company's comparable average ticket during the second quarter grew 7.5% year over year. Tractor Supply's customers were largely undeterred by higher prices. This is evidenced by the comparable average transaction count falling just 2% over the year-ago period. In addition, a 3.1% year-over-year rise in the company's total store count to 2,194, including its small-box pet specialty supply retailer, PetSense, explains the jump in net sales.
Tractor Supply recorded $3.53 in diluted EPS in the second quarter, which equates to a 10.7% growth rate over the year-ago period. This narrowly topped the average analyst diluted EPS estimate of $3.51 for the quarter. And it was the 10th quarter out of the past 10 quarters that the company has done so.
Tractor Supply's higher net sales were partially offset by higher merchandise costs, depreciation, and amortization. That's what led to a 10-basis-point year-over-year decline in net margin to 10.2% during the quarter. However, the company's share repurchases caused its weighted-average outstanding share count to dip 3.3% over the year-ago period to 112.3 million shares.
This is how Tractor Supply's diluted EPS growth lagged behind net sales growth for the second quarter. With more Americans moving to rural areas for more space and a lower cost of living, the company's future appears to be bright. In fact, analysts believe Tractor Supply will generate 10.4% annual diluted EPS growth over the next five years.
An enticing dividend with robust growth prospects
The reasons to like Tractor Supply extend beyond just its impressive growth potential. The stock offers a 1.9% dividend yield to investors, which is meaningfully higher than the S&P 500 index's 1.5% yield.
And with the dividend payout ratio set to be 38.4% in 2022, Tractor Supply's above-average yield isn't too good to be true. This manageable payout ratio allows the company to retain the capital necessary for future business expansion, debt reduction, and share buybacks. That's why I believe double-digit annual dividend growth should persist for the foreseeable future.
The valuation is reasonable
Tractor Supply is trading at a rational valuation for long-term investors for a stock that has created significant wealth over the last decade and counting.
The stock's forward price-to-earnings (P/E) ratio of 18.9 is far above the specialty retail industry's average forward P/E ratio of 14.8. But Tractor Supply's projected 10.5% annual earnings growth rate is slightly higher than the specialty retailer industry average of 9.8%. Given the stock's quality and superior growth profile, this is hardly an unreasonable valuation to pay for such an incredible wealth compounder.
