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3 Reasons To Buy Dollar General – And 1 Not To

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

Doing both of things together will help you earn higher than average investment returns and build your wealth.

There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.

The key to continue compounding your capital is to keep investing well over time… Combine this with dividends and you’re well on your way to building a retirement account you can live off.

And this is huge part of things.

But another huge part of this is also losing as little capital as possible.

The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.

Both things are necessary to build wealth. But most only think of investing well. 

Today, I want to show you 3 Reasons To Buy Dollar General – And 1 Not To.

Dollar General (DG) is a discount retailer where an estimated 80% of the items it sells at its 16,000 stores in 45 states nationwide sell for $5 or less.

Dollar General is one of the largest discount retailers in the United States by revenue.  And the 42nd largest retailer overall in the world by revenue.

The company is based in Goodlettsville Tennessee.  It has a $51 billion market cap.  And it also pays a 0.7% dividend.

This is reason #1 to buy Dollar General – because of its dividend.

Dollar General’s 0.7% Dividend

Over the last decade Dollar General’s paid out a total of $5.36 per share in dividends.

At today’s share count of 256 million shares that’s equal to $1.4 billion paid out to shareholders in the last decade.

This may not sound like much for a company of its size, but Dollar General only began paying out a dividend in 2016.

Since 2016 its dividend grew 50% from $0.88 per share in 2016 to $1.32 per share now.  This is an annual dividend growth rate on average of 12.5% per year.

These dividend payments will provide you a solid retirement income if you take the money out.  Or allow you to buy more shares over time if you reinvest the dividends.

Both help you earn higher returns over time and will especially help in any kind of prolonged economic issues like we’re dealing with today.

And its likely to continue growing this dividend significantly over time because its only paying out 17.1% of its earnings as dividends as of this writing.

It can do this because it earns good profits and cash flows.  Which is reason #2 to buy Dollar General.

Dollar General Earns High Profits

Over the last decade it earned an average operating income margin of 9.4% per year.

I look for anything above 10% on a consistent basis so Dollar General is right below this number.

Why 10%?

Because after evaluating thousands of companies over the last 13+ years of my career I estimate fewer than 5% of all companies in the world produce consistent operating profit margins above 10% over long periods of time.

This makes Dollar General a stellar operating business.

But it also means the company earns enough money from its operations to continue investing in the business for growth… Without having to issue debt or equity.

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 3% per year on average.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.

If companies are consistently above 5% on this number, it makes the company a cash machine that spits out more and more cash from its operations.

Dollar General fall just below my thresholds on both important metrics and that makes it a relatively safe investment.

These profits also allow it to continually reinvest in operations.  And to pay you a large and growing dividend as well.

Its large profits and cash flow and growing dividend payments over time make Dollar General a safe income play in whatever is to come in the next few months or years.

But these profits also allow another layer of safety because Dollar General’s business should be largely protected from negative effects of the coronavirus… Which is reason #3.

The Coronavirus Won’t Harm Dollar General

People may stop paying their mortgages.

They may stop paying their credit cards.

They may stop paying their vehicle loans.

And they may stop paying their student loans.

Because of the mass unemployment caused economic issues we’re now dealing with; people may stop paying these things if they need to.

But people won’t stop feeding their kids.

This was proved out when Dollar General released its 1st quarter 2020 financial results on May 1st, 2020.

  • Sales rose 27.6%.
  • Operating profit rose 69.2%.
  • Earnings per share rose 73%.
  • And cash flow from operations rose 202.4% in the quarter.

This should continue going forward no matter how long this pandemic lasts.

And we’ll find out for sure when Dollar General releases its 2nd quarter financial results later today… I’ll update you on these numbers next week.

But what about its valuation?  Is it cheap? 

Dollar General Is Not Cheap

This is the 1 reason to avoid Dollar General stock for the time being…

With the markets at or near all-time highs you’d expect a fantastic stock like Dollar General to be selling at a big valuation.

And it is.

As of this writing its P/E is 25.7.

Its P/CF is 15.

And its forward P/E is 23.8.

On all three metrics I look to buy investments below 20 to consider them undervalued.

This shows that Dollar General is currently overvalued… By a small margin.

And in investing terms this means Dollar General stock does not offer you a margin of safety in investing terminology.

When you invest in stocks that are undervalued and have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning its stock in the coming years.

The inverse of this is also true…

When you invest in a stock that is overvalued and without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

With Dollar General being overvalued it lowers the margin of safety and makes investing in its stock riskier right now.… And it also lowers the investment returns you should expect to own going forward too.

Conclusion

If you’re looking for a solid, safe, stable, dividend paying, and enormously profitable investment to protect your investment portfolio – consider investing in Dollar General… But only when its stock is cheaper.

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times. 

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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