It's always smart to consider dividend-paying stocks for your portfolio, as dividends can be such powerful wealth boosters. (Really -- they're not just for retirees!) A great place to find some solid contenders is among Dividend Aristocrats, companies that have raised their payouts annually for at least the last 25 years. Let's get to know one Dividend Aristocrat, Family Dollar Stores (UNKNOWN:FDO.DL), and see whether this is a good time to invest in some shares.
Nuts and bolts
Tracing its roots back to a store in Charlotte, N.C., in 1959, Family Dollar's empire now spreads across more than 8,000 locations in 46 states. Focusing on value and convenience, its stores offer name-brand and private-label goods spanning foods, toys, cleaning supplies, apparel, home decorations, health and beauty items, and much more. The chain's typically modest footprint per store (about 7,000 square feet) lets it squeeze into many locations, from rural areas to cities.
Why Family Dollar is appealing
Why would someone want to own stock in Family Dollar? Let's start with its dividend, which yields 1.6%. That might not seem extremely generous, but it has been increased by an annual average of 18% over the past five years. And with its payout ratio recently below 50%, there seems plenty of room for further growth. The company has raised its dividend for 38 consecutive years.
Another attraction is that the company tends to perform well in economic downturns. Many other retailers and manufacturers get whacked when financially worried consumers rein in their spending, but discount retailers tend to see business pick up at such times. Indeed, in 2008, when the S&P 500 plunged 37%, Family Dollar gained 38% and was the top performer in the index, while peers Big Lots only lost 9% and Dollar Tree popped 61%.
The biggest news surrounding Family Dollar these days is that Dollar Tree and Dollar General have been angling to merge with or buy the company, and activist shareholder Carl Icahn is pushing Family Dollar to go for it. Part of the reasoning behind such a combination is that a bigger discount-store entity can more effectively compete with the likes of Wal-Mart. Family Dollar has been rebuffing advances, but now appears interested in Dollar Tree's offer. Some have speculated that it might make sense for Wal-Mart to enter the fray, too. Dollar Tree recently had about 5,000 stores, which would bring the combined total to more than 13,000 locations and make the new company the largest discount retailer in America. While Family Dollar has focused on urban and rural locations, Dollar Tree is more suburban, and its customer base is a little wealthier, in general, than Family Dollar's lower- to lower-middle-income customers.
Why you might hold off on Family Dollar
If you're drawn to Family Dollar because of the potential from a merger, be careful. Such a deal has yet to be inked, and any deal might still be derailed by antitrust concerns.
On its own, Family Dollar has underperformed its peers on many metrics, such as revenue per square foot and profit margins. It is working on improving its numbers, though, in part by closing hundreds of underperforming stores and opening new sites.
The company's financial statements offer some reasons to worry, too, such as falling profit margins and negative free cash flow. (Price cuts on merchandise have contributed to falling margins.) Its debt far outstrips its cash, and inventories have been rising, suggesting more product is languishing on shelves. Management, meanwhile, has blamed the poor economy -- but the poor economy helped the company in the past, and seems to be aiding its rivals now. Thus, management's defense for poor performance isn't too convincing.
Is it time to buy?
There are plenty of reasons to want to buy into Family Dollar, but its valuation is not compelling at recent levels. Current and forward-looking P/E ratios of 25 and 23, respectively, are well above the company's five-year average of 17. Its price-to-sales ratio of 0.9 tops its five-year average (0.7) and the industry average (0.6). Part of the reason for this is that the stock has been bid up as takeover offers have been made at increasingly higher levels. Whether a buyout happens or not, the stock seems overvalued right now.
Go ahead and keep an eye on Family Dollar, but this doesn't seem to be best time to buy this Dividend Aristocrat.