Friday, June 8, 2012

Family Dollar Stores Stock Analysis

Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores primarily for low and middle income consumers in the United States. This dividend aristocrat has paid uninterrupted dividends on its common stock since for 36 years in a row. The company’s last dividend increase was in January 2012 when the Board of Directors approved a 16.70% increase to 21 cents/share. Family Dollar‘s largest competitors include Target (TGT), Dollar Tree (DLTR) and Big Lots (BIG). Over the past decade this dividend growth stock has delivered an annualized total return of 8.20% to its shareholders.

The company has managed to deliver 10.70% in annual EPS growth since 2002. Analysts expect Family Dollar to earn $3.66 per share in 2012 and $4.23 per share in 2013. In comparison Family Dollar earned $3.12/share in 2011.
 The company has been able to increase return on equity from 20% in 2002 to over 30% in 2011. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 11.60% per year over the past decade, which is higher than to the growth in EPS.
A 12% growth in distributions translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 1988 we see that Family Dollar has managed to double its dividend every six years on average. Over the past decade, the dividend payout ratio has remained steady between 20% and 30%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently, Family Dollar is overvalued at 20 times earnings and yielding 1.20%. I would keep a close eye on the stock however, and would consider adding to my position on dips below $40/share.

 Full Disclosure: Long FDO

 Relevant Articles:

 - Avoid Cyclical Dividend Growth Stocks
My Dividend Retirement Plan
Dividend Aristocrats List for 2012
Dividend Growth Stocks by Sector - Retail

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