Dollar Tree's Buyback Is A Gem In Plain Sight

| About: Dollar Tree, (DLTR)


Dollar Tree is buying back about 6% of its outstanding stock each year.

The company has reduced its share count by 39% since 2004.

The company is simultaneously benefiting from growing store counts and rising levels of profitability, which amplify the effects of the buyback program.

Since March of 2004, Dollar Tree (NASDAQ:DLTR) has offered investors annual returns of 18.35%, turning every $1,000 invested in Dollar Tree into $5,427. Over that time period, Dollar Tree increased its total profits from $180 million to $615 million. If profits only grew by 341%, why did Dollar Tree shareholders receive a 542% return on their investment? It's not due to valuation changes: Dollar Tree traded at 18x profits in 2004, and trades at 18x profits now.

The answer is this: 2004 marked the year that Dollar Tree management decided "we are going to do what Autozone did and use our very large amounts of free cash flow to systematically destroy giant blocks of stock to boost earnings per share for our owners." Since that time, Dollar Tree has been buying back between 15 million and 30 million shares annually (an exception was the year 2008 when the company had to issue stock for acquisitions).

Most impressively, Dollar Tree is one of the few companies that managed to stick with its buyback program during the financial crisis, when the price of its shares fell from $14 to under $7 per share. To me, proof of buybacks during market lows are the most impressive because it shows that management is actually committed to acting intelligently by retiring shares when it is financially advantageous to do so.

The company had 272 million shares during 2008, and lowered the share count 262 million in 2009, for a 3.67% reduction in the share count. The company again lowered the share count in 2010 to 246 million, for a 6.10% reduction in share count. Most impressively, the company was committed to growing its business during this time, as it increased its store count from 3,591 in 2008 to 3,806 in 2009 to 4,101 in 2010 (for a total store count increase of 14.20% from the start to the end of the financial crisis). Most impressively of all, the company increased its profits from $229 million in 2008 to $397 million in 2010, meaning that the company's core business experienced 73% total growth during the crisis.

A look at the company's financials over the past decade seem to indicate that everything is improving. The number of stores doubled. The company's net profit margins increased from 5.8% in 2004 to 7.8% here in 2014, indicating increased efficiency and leanness because the company's gross margins have stayed pretty close to the 38% rate over the past decade.

And, of course, the company's stock buyback program has been an outstanding source of wealth creation. In 2004, Dollar Tree's profits had to be split into 339 million pieces. Now, they only have to be divided in 208 million pieces. Each share of Dollar Tree is entitled to 39% more profit today than it was in 2004, which is especially impressive when you take into account that Dollar Tree had to issue some stock to make acquisitions along the way.

The company is currently authorized to repurchase $2 billion worth of its stock:

Dollar Tree, Inc., the nation's leading operator of discount variety stores selling everything for $1 or less, announced that its Board of Directors has authorized the repurchase of up to $2 billion of its common stock. Stock repurchases may be made, from time-to-time, either in the open market or through privately negotiated transactions, depending on market conditions and other factors, in accordance with Securities and Exchange Commission requirements. This new program replaces the October 2011 share repurchase program.

Although the announcement does not give a specific duration for the terms of the buyback, it suggests that the company will be repurchasing about 18.5% of its outstanding stock in the next couple of years. Using the company's past history of retiring about 6% of its outstanding stock in a year as our guide, a reasonable estimate seems to be that the company will take three to four years to repurchase the stock.

Dollar Tree seems to be one of those few companies where investors can find a core business growing at a healthy rate in addition to a very large buyback that is retiring a meaningful amount of shares. The company's store count has increased every year since getting serious about stock buybacks in 2004, and the current store count of almost 5,000 is set to increase even more as the company adds 850-1,100 stores in Canada. The core profits of the business have tripled since 2007 (from about $200 million to about $600 million), and that is before we take into account the effects of the buyback program.

Dollar Tree has increased earnings per share by 27.0% annually over the past five years, and 18.0% over the past ten years. That's because the company is growing organically and retiring large amounts of stock simultaneously. Same-store sales are increasing at a 4% annual clip, and the company typically increases its store count by 5-6% annually, which sets the stage for 10% annual core business growth. In addition, about 6% of the company's shares are being retired each year. That's why Dollar Tree has delivered such excellent returns over the past decade. The good news for you is that the company is trading at about 18x earnings, enabling you to get a reasonable deal on a company with an excellent earnings per share growth rate.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.