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Better Buy: Wal-Mart Stores, Inc. vs. Dollar General Corp.

By Adam Brownlee - May 4, 2016 at 6:00PM

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Which discount retailer is the better pick?


Deep discounters create great value for customers by passing along the savings that spring forth from their business models. The stocks of these companies can also richly reward investors if the fundamentals are strong. Let's look at some key metrics for two discount retailers and see which is the better pick.

A look at the price performance for Wal-Mart Stores (WMT 0.86%) and Dollar General Corp. (DG 0.60%) over the past 12 months shows opposite stories. Since April of last year, Wal-Mart is down 15% and Dollar General is up by just over 7%. The reason for the difference is that sales and earnings growth has been slow for Wal-Mart and healthy for Dollar General. In 2015, Wal-Mart reported a slight sales decrease compared with last year and Dollar General turned in an increase of nearly 8%. Not surprisingly, earnings were down for Wal-Mart in 2015 while Dollar General reported a healthy bump.

Bad news can lead to opportunity, though. A look at valuation metrics shows that Wal-Mart does, in fact, present a tick more value than Dollar General. Wal-Mart has a trailing earnings multiple of 15. Dollar General, on the other hand, has a trailing earnings multiple of 20. A look forward tells a different story, though, as both Wal-Mart and Dollar General trade at a forward earnings multiple of about 16. If earnings for the year play out according to investors' expectations, then both companies are priced about the same using this metric. In the end, Wal-Mart wins valuation based on its trailing earnings.

When it comes to current yield, Wal-Mart is the clear winner, as it pays a dividend yield of 2.86%. Dollar General, on the other hand, carries a current yield of 1.12%.

Are these yields sustainable? To answer that question, we look at the amount of earnings being paid out to cover dividends, and we find a stark difference. Wal-Mart uses 43% of its earnings to cover dividends, while Dollar General uses a mere 22%.The reason for the difference is that Dollar General is able to find more uses for its earnings within the business. Wal-Mart, on the other hand, is returning value to shareholders through dividends. In both cases, though, each company has plenty of room to cover dividends.

A look at dividend history shows that Wal-Mart is the clear winner when it comes to payouts. Wal-Mart has been paying dividends for over 40 years now, and Dollar General only started paying last year.

Future growth for Dollar General is fairly simple: Open more stores. The company plans to open an additional 1,900 stores by 2017, bringing its total store count to over 14,000. Management projects that this pace will help the company reach annual revenue growth of between 7% and 10% over the coming years.This goal appears reachable, as Dollar General ranked 24th on a list of top retailers by revenue in 2014, with sales of almost $19 billion. The leader of the list, Wal-Mart, had sales of over $343 billion,  which shows that Dollar General has a long runway.

Growth for Wal-Mart, on the other hand, is trickier. The retailer is closing stores as it tries to prop up lagging same-store sales. Management is looking to its Internet business for additional help, and it's showing some green shoots. E-commerce for Wal-Mart grew by 12% in its last fiscal year, though it represented only a fraction of Amazon's online sales. This number shows room for plenty of growth, but investors will have to be patient, as management is calling for flat overall revenues this year.

In the final analysis, Wal-Mart is the winner when it comes to valuation and dividends, but Dollar General has a clearer runway for growth. For investors seeking a long-term dividend play that's selling at a discount, Wal-Mart is the way to go. For those seeking growth, Dollar General is the better pick.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$122.63 (0.86%) $1.05
Dollar General Corporation Stock Quote
Dollar General Corporation
$246.35 (0.60%) $1.46

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