Wednesday, March 26, 2008

FDO Dividend Analysis

Family Dollar Stores, 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.

At the same time 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 6991 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
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