Dividend Analysis - Family Dollar Stores Inc (NYSE:FDO)
31 July 2007Today’s analysis takes me to Family Dollar Stores Inc - another member of the S&P 500 Dividend Aristocrats. Family Dollar Stores Inc trades on the NYSE under the symbol FDO.
Company Profile:
From Yahoo Finance
Family Dollar Stores, Inc. operates a chain of self-service retail discount stores in the United States. The company’s stores offer products in four categories: consumables, home products, apparel and accessories, and seasonal and electronics.
FDO has a market capitalization of $5.03B and employs over 24,000 people.
Company Fundamentals:
My analysis typically starts with a look at the return on invested capital. And today’s analysis is no different. And the trend that I see concerns me. The trend is downwards. It is not overly significant, but still a concern. Management was delivering an ROIC of 20% from 1999-2001. In 2005 and 2006, management has been delivering closer to 16%. The 5 year average ROIC is 17%.
Return on equity has been quite consistent. The 10 year average is 18.4% and the 5 year average is 17.95%. This is interesting as FDO does not have a large amount of debt. Total debt makes up 16.4% of capital.
Equity growth rate has definitely declined. From a 9 year average of 13.48% to a 5 year average of 7.9% to a 3 year average of 2.47% to last year’s decline of 6.90%. Definitely not the trend I want to see.
And earnings per share growth rate follows the same trend as equity growth rate. Steadily declining from the 9 year average of 13.38% down to the 3 year average of negative 0.4%. The good news here is that last year’s EPS growth rate has returned to its historical highs of 13.85%.
Sales growth rates have been declining as well. In the early part of the 10 year period, growth rates in the 17%-18% range were being achieved. Most recently, we are looking at growth rates of 9%-10%.
The fundamentals are not what I am looking for in a dividend payer.
Dividend Fundamentals:
FDO has a current dividend yield of 1.33%. I would consider this below average considering that the dividend yield of the S&P 500 Index is 1.89% and the DJIA is 2.26%. A great dividend growth rate can make up for a lower dividend yield.
And in this case, FDO has produced a very consistent 11% dividend yield over the entire 10 year period. That is impressive. Does the 11% make up for the low yield today? That remains to be seen depending on whether the 1.33% is considered a low yield or a high yield for FDO.
The dividend payout ratio is at a low 27.03%. Lots of room for management to increase dividends if desired.
The cash flow growth rate has been declining like many of the fundamentals from a 9 year growth rate of 15.43% to a 5 year rate of 8.96% to a 3 year rate of 6.02%. Good news is that last year’s rate was 20.71%.
Valuation Models:
Let’s have a look at my 3 valuations models and determine a model price.
From a dividend yield perspective, the 5 year average high dividend yield has been 1.49%. However, over the last 2 years, the high dividend yield has exceeded that with yields of 1.85% and 2.06%. The 10 year average high dividend yield is 1.65%. I will use that as the yield that I demand as an investor which gives me a model price of $27.92. That means that Mr. Market is currently charging a premium of 23.66% for FDO. And really, with the last 2 years being higher than this yield, I would probably demand a bit higher yield.
Benjamin Graham would agree that FDO is currently overpriced. The Graham number works out to $17.23 and implies a premium of 100.35%!
My discounted present value model was difficult this time around.
Determining the future P/E was fairly easy in that FDO has always had a consistent P/E. The 10 year average is 21.72, the 5 year average is 21.36 and the current P/E is 21.05. So my initial estimate for future P/E is 21.05.
For the future EPS growth rate, my initial estimate is 7.9%which comes from the 5 year equity growth rate. Analysts have forecast 13%, but I am going to go with my more conservative value especially considering the declining trends that I have seen. And this is where my dilemma comes in. Rule of thumb for the P/E is twice the future EPS growth rate. In this case, that would be 15.8. I would argue that investors are currently paying too much for FDO.
Continuing on with the analysis, I will demand a minimum dividend yield of 1.65% and a future dividend growth rate of 11.11%.
With this information, my model price is $17.49. This price is very close to the Graham number and means a premium of 97.33%.
See my FDO calculations here.
Here is the 1 year stock price chart:
It seems that the time to purchase this stock was back in July of 2006. That was as close as FDO approached the $18 mark.
Conclusion:
I would not add FDO to a portfolio of superior dividend paying stocks. Although I like the steady 11% dividend increases, the company fundamentals worry me. Not to mention that I feel that this stock is highly over valued.
Any thoughts on FDO?
Full Disclosure: I do not own any shares in FDO.
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on July 31st, 2007 at 1:19 pm
This isn’t specific to FDO, but I saw this article about dividend yields and wanted to share:
Five Good Yield Plays