It's official. After a more-than-year-and-a-half review by the Federal Trade Commission (FTC), Tractor Supply (TSCO 3.26%) has closed its acquisition of fellow rural retailer Orscheln Farm and Home.
As per an agreement with the FTC, Tractor Supply will retain 81 Orscheln locations and sell the other 85 (along with Orscheln's headquarters) to two other small farm and home retail chains in the Midwest. After these sales, the net purchase price will be $238 million. As of the end of June, Tractor Supply had $531 million in cash and equivalents, so it will be able to use cash off its balance sheet to complete the deal.
This is a milestone for Tractor Supply as it steadily expands its footprint across the country. And while the U.S. housing market is in total disarray at the moment, the pandemic has accelerated an American migration to more suburban and rural areas. Tractor Supply is thus a growth company. It also pays a dividend, and that payout could steadily rise in the years to come.
A best-in-show retail story
In its Q2 2022 earnings update, Tractor Supply said net sales increased 8.4% year-over-year to $3.9 billion. A key driver of this growth was comparable store sales (a blend of foot traffic and average shopper ticket size), which was up 5.5%. That builds on comp sales growth of 10.5% in the prior year. The company's earnings per share increased 10.7% in the quarter, with $188 million worth of share repurchases helping to offset some negative effects of inflation.
For 2022, Tractor Supply expects revenue growth of about 10% (or a range of $13.95 billion to $14.05 billion), and earnings-per-share growth of about 11% (based on a range of $9.48 to $9.60 per share). Inflation has been taking a toll on consumers this year, and some retailers have been lowering guidance in recent months. When announcing it had finalized the acquisition of Orscheln, Tractor Supply didn't provide a full update. However, it did say it expected Orscheln to add about $0.10 in earnings per share and $300 million to full-year revenue, which it expects to be "over $14 billion."
Suffice to say it sounds like Tractor Supply is holding up well in this inflationary environment, even as many households are tightening up their spending on non-essential home goods.
The bigger long-term story here, though, is that adding Orscheln to the mix increases Tractor Supply's footprint in the Midwest. The company says it now has over 2,100 stores and sees expanding to about 2,800 total locations over time -- a 33% increase over its current store count.
Buy for that growing dividend
Tractor Supply looks poised to deliver gradual growth for years to come, and further migration in the coming years to more rural areas of the country would be an additional benefit for this retailer. But another top reason to invest in Tractor Supply is its growing dividend. From an initial quarterly payout of $0.04 per share in 2010, it has grown to $0.92 -- good for an annualized yield of 1.8%.
There's room for that payout to expand, too. Through the first half of 2022, dividend payments cost Tractor Supply $206 million, compared to free cash flow (from which dividends are paid) of $361 million. If Tractor Supply can continue its store expansion and maintain its healthy operating margins of about 10% (most retailers are doing pretty well with a high-single-digit operating margin), this dividend could head higher still in the coming years.
After falling over 15% from all-time highs this year, Tractor Supply still isn't a bargain. It trades for 22 times trailing 12-month earnings. But dividend stocks -- especially those with growing dividends -- are a top way to earn handsome investment returns over the long-term. Put this top retailer on your watchlist after its acquisition, which should strengthen its expansion opportunity.
