Dollar General Corp. (NYSE: DG) is a discount retailer that provides various merchandise products in the southern, southwestern, Midwestern, and eastern United States. 

Dollar General's Dividend Growth

The company initiated a dividend in 2015 at a quarterly rate of 22 cents/share and has managed to boost it to 42 cents/share in 2021. The rate of the last dividend increase was 16.67% in March 2021. I expect a higher than average dividend growth, because the company is in the initial phase of dividend growth, has a low dividend payout ratio and it also grows earnings at a decent rate.

Between 2011 and 2020, the company managed to increase earnings from $2.22/share to $10.62/share. The company is expected to earn $10.19/share in 2021.

Growth in earnings per share will be driven by increase in number of stores, increases in same-store sales, and share buybacks. Driving profitable sales growth and capturing growing opportunities should serve DG well, along with improving its advantage as a low-cost operator.

Compelling Value

Dollar General offers compelling value and convenience to its shoppers, through competitive prices in a small store format. Most of the goods sold by Dollar Stores are food and daily essentials, which are less frequently purchased online and are for immediate consumption, limiting the appeal of waiting days or more for delivery. Dollar stores are able to open in areas other retailers wouldn't because of their small size. A large portion of new stores opened in the US this year are Dollar stores, with about 1/3^rd of them being Dollar General stores.

The company offers convenience to its shoppers, has the advantages of scale, and has the purchasing power to maintain low costs. It offers a lot of private labels in its stores, and a limited number of items, which is good for margins. Most of DG’s stores are in smaller towns, which makes it a very competitive option for shoppers and explains the high gross margins. The company can increase penetration in urban markets, which can bode well for sales. Only about a quarter of stores are in urban areas. This means that 75% of stores are in areas with population of less than 20,000 people. They are strategically placed in food deserts, where other grocery options are miles away. The typical consumer is a lower-income family, that doesn’t shop in large quantities.

Investing in high-growth opportunities, including new store expansion and other strategic initiatives, should remain at the top of the priority list when it comes to capital allocation. The company can also continue investing in its distribution center network, in order to support new store growth and increased productivity. Initiatives include focusing on non-consumables, DG Fresh, and Fast Track.

Dollar stores are also capturing more affluent shoppers hunting for discounts on essentials. Consumers may be looking to save even more money now that inflation is ticking up.

Share Repurchases

Dollar General has repurchased shares at a steady clip over the past decade. It looks like the company has managed to repurchase at least 3% of shares outstanding in each year since 2011. The only exception is in 2018 when it repurchased 2.56%.

The dividend payout ratio started at 22.30% in 2015 and is at 13.60% today. There is ample room for future dividend growth from earnings growth, as well as a gradual increase in the dividend payout ratio.

The stock is selling for 21.44 times forward earnings and yields 0.77%. While the company is at the top of its valuation range in terms of P/E, it will most probably grow earnings per share at a decent rate over the next decade.