Family Dollar Stores: Favorable Dividend Analysis

Family Dollar Stores (FDO), Inc. operates a chain of neighborhood retail discount stores in the United States. It offers general merchandise in four categories: consumables, home products, apparel and accessories, and seasonal and electronics.

Family Dollar Stores is a dividend aristocrat as well as a component of the S&P 500 index. Over the past 10 years this dividend growth stock has delivered an annual average total return of 4.50 % to its shareholders. After peaking at 44 in late 2003 though, the stock has gone nowhere for four years.

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At the same time the company has managed to deliver an impressive 12.66% average annual increase in its EPS over the past nine years.

The ROE has been hovering in the 15% - 21 % range over the past 10 years.

Annual dividend payments have increased over the past 10 years by an average of 11.20% annually, which matches the growth in EPS. A 12% growth in dividends translates into the dividend payment doubling almost every 6 years. If we look at historical data, going as far back as 1990, FDO has indeed managed to double its dividend payments every six years.

If we invested $100,000 in FDO on December 31, 1997 we would have bought 6,991 shares (Adjusted for 2:1 stock split in April 1998). Your first dividend payment would have been $314.60 in March 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend payment would have risen to $980.50 by December 2007. For a period of 10 years, your quarterly dividend income has increased by 155 %. If you reinvested it though, your quarterly dividend income would have increased by 212%.

The dividend payout has remained below 35% over the past 10 years. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that FDO is attractively valued with its low price/earnings multiple of 13 and slightly above-average yield at 2.30%.

Disclosure: I own shares of FDO.

Comments

[jeffaim]

It seems that equity has decreased steadily, making that attractive rise in ROE seem less impressive. See what fellow alpha-seeker blogs:
seekingalpha.com/article/43177-family-do...

[granger]

I keep enjoying your analysis. I really learn a lot from every dividend study. I have long been a believer in long term holdings of consistent dividend payers.

I am curious what your thoughts are on some of the Wisdom Tree ETF, specifically the dividend driven ones. The expenses are low, they adjust annually (so in a way actively managed). The volatiltiy, performance, and correlation looks great on many of their funds.

What is your opinion? I still favor individual equities, but am alwyas looking for ideas.

[Dividend Growth Investor]

Jeffaim,

The stock has declined from the mid 30's to less than $20 right now. So it's priced attractively for me.

Granger,

Thanks for the nice comments.
While there seems to be an advantage for the small investor with several thousand dollars to invest in buying a predetermined basket of dividend stocks in terms of paying less commissions for buying one ETF, versus paying commissions on buying separately each and every stock in the index, there are disadvantages as well. First of all some of these ETF's follow indexes which are updated only once an year. Thus, they might still be holding stocks which have failed to increase their dividend in the past year due to timing. Second, you might not want to buy certain sectors which you perceive as having further downside possibility. A weak sector which comes to mind right now is financials, which seems to have a higher than average sector-weight in the plethora of dividend ETF's like the DVY for example. Third, some of these ETF's are weighted according to different formulas, which might add to or detract from performance. I myself am a firm believer in equal weighted investing, which outperforms the market by a little over large periods of time. And fourth the dividends from some of these ETF's seem to be following an erratic pattern, rather than the stable and consistent growth that their individuals stock components should have achieved