Wednesday, September 8, 2021

Tractor Supply Company (TSCO) Dividend Stock Analysis

Tractor Supply Company (TSCO) operates rural lifestyle retail stores in the United States. The company sells its products to recreational farmers, ranchers, and others, as well as tradesmen and small businesses. Tractor Supply Company was founded in 1938 and is headquartered in Brentwood, Tennessee.

 The company provides livestock and pet products (47% of 2020 sales); hardware, tools, truck, and towing (21%); seasonal products (such as snow blowers and mowers), gifts, and toys (21%); clothing and footwear (7%); and agriculture (4%).

As of December 2020, it operated 1,923 Tractor Supply retail stores in 49 states. The company operates its retail stores under the Tractor Supply Company, Del's Feed & Farm Supply, and Petsense names.

The company had 182 Petsense stores at the end of 2020. It also operates Websites under the and names. 

Tractor Supply has managed to increase dividends every year, since initiating a dividend in 2010. The company usually increases dividends in May.  Tractor Supply has managed to increase dividends over the past 5 years at an annualized rate of 14.60%. Future dividend growth will be a little higher than earnings growth over the next decade, assuming a slight expansion in the payout ratio.

The last dividend increase was in January 2021, when Tractor Supply increased its quarterly dividend by 30% to 52 cents/share. This was the second dividend increase in a year. The first one was in August 2020, when the company increased dividends by 14.28% to 40 cents/share.

Tractor Supply managed to boost earnings from $0.81/share to 2009 to $6.38/share in 2020. The company provided fiscal 2021 diluted EPS outlook in the $7.70 to $8/range.

Tractor Supply expects to grow earnings through several levers, including same stores sales growth, opening new stores, strategic acquisitions and share buybacks.

The company expects to grow the number of stores under Tractor Supply and Petsense brands. During fiscal 2020, the Company opened 80 new Tractor Supply stores and nine new Petsense stores and closed one Tractor Supply store and seven Petsense stores. There are 1923 Tractor Supply stores and 182 Petsense stores. Analysts expect that the number of Tractor Supply stores could reach 2,500 locations over the upcoming decade, and Petsense to a little over 300. According to the company research, there is an opportunity to build out the site levels to 2,500 stores.

The company plans to open about 80 new Tractor Supply stores and 10 new Petsense locations in FY2021.

Tractor Supply acquired a portfolio of 136 Petsense stores in 2016 for $116 million. It expected to grow the number of stores at a double-digit rate of increases every year. There is an opportunity for expansion, given the fact that the pet industry is a $60 billion market. Albeit it is competitive, which means that having a unique niche can pay dividends if the business plan is executed in a smart way.
The company has been repurchasing stock over the past decade (more on that below), which increases earnings per share, and increases your ownership of the enterprise.

The stock had gone nowhere for several years between 2014 and 2019, despite the fact that earnings per share kept growing at a fast pace. It looks like Tractor Supply was overvalued five years ago, and in the past two years the fundamentals are finally catching up to the lofty share price expectations from a few years ago. 

The company’s sales are somewhat insulated from the threat of e-commerce, due to its unique assortment of niche goods that are needed right away and/or are expensive to ship. It has a unique geographic positioning in rural areas. However, it is trying to focus on an omni-channel experience, where customers can buy a product online, and pick it up in-store.

Improving productivity, and removing cost from the structure could result in margin increase, and improve profitability as well.

Tractor Supply definitely benefited from Covid-19, as its rural customers flocked to its stores.

The company has managed to reduce the number of shares outstanding over the past decade, through consistent share buybacks.  The company remains committed to returning cash to our shareholders through our share repurchases and dividends while maintaining a disciplined approach to capital allocation. The number of shares outstanding has declined from a high of 149 million in 2010 to a low below 117 million shares by late 2020.

The payout ratio has been on the rise since initiating the dividend in 2010. Currently, Tractor Supply distributes approximately 30% of earnings in the form of dividends. This is a low amount, and leaves enough room for future dividend increases, while balancing the needs of the business. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business.

Currently, the stock is selling for 24.85 times forward earnings. It offers a low current yield of 1.05%. While the yield is low, I believe that Tractor Supply offers the opportunity for above average dividend growth over time. 

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