With stock market indices like the S&P 500 and the Nasdaq 100 trading at borderline frothy valuations, there's a shortage of high-quality companies with attractive valuations. Nevertheless, there are still opportunities, as few and far between as they may be.
One of the few exceptional brands investors can still buy today at a compelling valuation is Tractor Supply (TSCO +3.58%), the country's leading rural-lifestyle retailer. Not only does Tractor Supply offer investors attractive long-term share-price-appreciation potential, but it also pays a solid and growing dividend. Further, this payout is likely to rise significantly over the next five years.
Here's a closer look at why Tractor Supply is a great investment idea to consider today.
NASDAQ: TSCO
Key Data Points
The retailer's headwinds are likely only temporary
Perhaps one reason Tractor Supply trades at only 26 times earnings while other leading retailers, like Costco and Walmart, command much higher valuation multiples is because the company is currently delivering significantly worse year-over-year growth rates for its investors than it usually does. For instance, Tractor Supply's second-quarter net sales only increased 1.5% year over year.
Sales would have declined if it weren't for new store openings. The company's comparable-store sales (a metric measuring sales at stores that have been opened for at least 12 months) decreased 0.5% year over year.
Before investors run for the hills, some context is in order. During the COVID-19 pandemic, Tractor Supply benefited from huge growth in both new customers and the amount of money those customers were spending at its stores. As Tractor Supply CEO Hal Lawton often explained to investors during the company's earnings calls, this period was marked by a shift in consumer spending away from services to goods, providing a massive tailwind for the business.
The company's execution on key business themes, like its loyalty program, and improvements to its store layouts have helped, too. As far as consumer spending habits go, things are reversing. The company has been facing a significant headwind of consumer spending shifting back to more normalized patterns.
This headwind, however, is moderating. Consumers' proportionate spending levels on services and goods have almost fully returned to pre-COVID trends.
While it's tough to predict when the trough in the company's comparable-store sales metric will happen, it's likely to occur in the next one to three quarters. After its comparable-store sales-growth rate bottoms, Tractor Supply will likely begin working its way back toward its long-term target to grow them at a rate of 4% to 5% year over year. When combined with its goal to open about 90 stores per year, the company's growth algorithm is attractive at the stock's current valuation.
Strong dividend growth potential
Another reason to consider buying Tractor Supply shares is more simple: its dividend. Sure, its dividend yield of 1.6% isn't mouthwatering, but the dividend makes up for its underwhelming yield with attractive growth potential.
First of all, investors should note that the company is paying out just 41% of its earnings in dividend payments today. As Tractor Supply matures, the company could increase this figure if they want to.
Equally as important, Tractor Supply has proven to investors that its dividend is a priority. It has displayed this by rewarding shareholders with significant dividend growth since the first payment was sent to shareholders in 2010. Indeed, growth in the dividend payout has been particularly strong over the last five years, with the quarterly payout more than tripling.
Overall, Tractor Supply shares look like an attractive long-term investment. The company dominates an easy-to-understand industry, has shares trading at an attractive valuation, and is paying investors a dividend that's likely to grow meaningfully over the next five years.
