Dollar General Is Killing It

Generating a record 2.5 billion USD in free cash flow this year, Dollar General (DG) is once again thriving under these challenging economic conditions as it tends to do in nearly every shaky environment. With the onset of COVID-19, management made the right operational decisions and temporarily suspended share repurchases to maintain its rock-solid liquidity structure. Let's highlight a couple of reasons why we like the stock very much.

During the latest Q2 earnings call, CFO John Garratt announced the authorization of a new 2 billion USD buyback program while there's still 481 million USD remaining under the current scheme. It plans to complete $2.5 billion in share repurchases by the end of its fiscal year in January. With 1.1 billion USD in net debt at the end of Q2 - impacted by favorable changes in working capital requirements of approx. 1 billion USD - Dollar General can now easily buyback 5% of the free float every single year.

(Source: Option Generator AM)

Since 2012, Dollar has been reducing its share count by 30%, providing clear support to its stock price. At Option Generator, we bank on an annual reduction of 5% for the years ahead.

(Source: Option Generator AM)

The main reason why we like Dollar General? It's impressive track record and steady growth engine, allowing for long-term visibility and wealth compounding. For over 30 years in a row, same-store-sales growth has been positive.

(Source: Investor Presentation)

(Source: Option Generator AM)

While there's a visible and very positive impact of COVID-19 on its profit margins, the trend of improving profitability is set to continue as the rollout of key strategic initiatives is gaining traction. Most importantly, these investments have an attractive return attached to them, providing an additional kicker to rising margins.

(Source: Option Generator AM)

Despite the retail collapse and e-commerce boom threatening traditional brick-and-mortar players, Dollar General's clear focus on rural areas and households with below-average income won't stop bearing fruit. If Biden wins the US elections, higher minimum wages will trump Dollar General's revenues and profits. If a prolonged period of uncertainty is in front of us, stock-piling will also favor the discount retailer.

(Source: Option Generator AM)

Conclusion

The graphs above point out the strength of Dollar General and the resilience it has shown during depressed economic conditions. The fact that it ranks #5 on the low-volatility list makes it an even greater buy at current prices. A good underlying for various option strategies, a fair value of $235 based on our conservative Discounted Cash Flow method... Dollar General should earn a spot in your portfolio.