Technology is greatly impacting the way Americans choose to live their lives. The Information Age is allowing more Americans to work remotely than ever before. That largely explains how two million more people moved into the suburbs or rural areas than moved out from March 2020 to March 2021.
This trend away from urban living and more toward country living bodes well for the likes of rural lifestyle retailers like Tractor Supply (TSCO 0.44%). Here are three reasons investors seeking dividend growth should consider the stock for their portfolios.
NASDAQ: TSCO
Key Data Points
A business built to endure all environments
Founded in 1938 during the Great Depression, Tractor Supply has survived and thrived despite numerous recessions and military conflicts during that time. So what is the secret to the company's success?
Tractor Supply is and always has been receptive to its customers' needs. The company and its 52,000-plus team members pride themselves on providing customers with quality customer service, an expansive product offering, and low prices.
This has allowed the retailer to expand to nearly 2,200 Tractor Supply stores in 49 U.S. states and 189 Petsense specialty pet supply locations as of April 1. Tractor Supply acquired Petsense in 2016 and has been gradually opening more stores since then to strengthen its hold on the $60 billion-plus pet supply market.
| Q1 2022 | Q1 2023 | |
|---|---|---|
| No. of Store Locations, Including Petsense | 2,181 | 2,353 |
| Sales Growth Rate (YOY, Comparable Sales) | 5.2% | 2.1% |
| Net Profit Margin | 6.2% | 5.6% |
Data source: Tractor Supply. YOY = year over year.
The Tennessee-based retailer recorded $3.3 billion in net sales during the first quarter ended April 1, a 9.1% year-over-year growth rate. Thanks to higher prices, the company generated comparable average ticket growth (i.e., the average transaction amount) of 2.8% for the first quarter.
Consumers largely tolerated these higher prices, with the comparable average transaction count (e.g., the total number of transactions across all stores for a period) declining just 0.7% during the quarter. And considering the delay in the spring selling season throughout most of its markets, this likely weighed on foot traffic more than increased prices.
Seeking to enter new markets with a need for rural lifestyle retailers, Tractor Supply's total store count compounded at a high-single-digit rate over the year-ago period. These factors help explain how the company generated solid top-line growth in the first quarter.
Tractor Supply's diluted earnings per share (EPS) remained unchanged at $1.65 for the first quarter. The company's improved net sales were more than canceled out by faster growth in cost of merchandise sold and selling, general and administrative expenses during the quarter. This is what led Tractor Supply's net margin to fall from the first quarter of 2022 to the most recent quarter. The retailer's reduced profitability was fully offset by a 3.2% decrease in the diluted share count in the quarter.
Moving forward, analysts believe that Tractor Supply's diluted EPS will grow by 9.2% annually through the next five years. This growth is expected to be powered by new store openings, comparable store sales growth, and share repurchases.
Image source: Getty Images.
The payout has tremendous growth potential
At first glance, Tractor Supply's 1.7% dividend yield doesn't seem to be that special; after all, it merely matches the S&P 500 index's 1.7% yield. But the company's quarterly dividend per share has more than tripled to the current rate of $1.03 in the past five years. This is why investors would be wise to focus more on where the payout is headed than where it is now.
TSCO Dividend data by YCharts.
Tractor Supply's dividend payout ratio is also positioned to come in at below 40% in 2023. That should leave the company with the funds needed to grow its store footprint, repay debt, and complete share buybacks, which should fuel further dividend growth.
A sensibly priced stock
Up 7% to date, shares of Tractor Supply are off to a solid start in 2023. And it appears that the stock is still a reasonable value for dividend investors seeking to beat the market.
Tractor Supply's forward price-to-earnings ratio of 20.8 is well above the specialty retail industry average of 15.7. But considering the company is the largest player in the rural lifestyle retail industry and has strong growth potential, this above-average valuation can be rationalized, in my opinion.
