Wednesday, August 13, 2008

* Stock Analysis: Family Dollar Stores Inc. (FDO)

Linked here is a PDF copy of my detailed analysis of Family Dollar Stores Inc. (FDO) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Family Dollar Stores Inc. operates a chain of more than 6,500 retail discount stores in 44 states across the U.S.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
FDO is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuation and average the remaining two, FDO is trading at a 12.9% premium. FDO had a Star deducted for trading at a premium in excess of 5%.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
FDO earned one Star in this section for 3.) above. FDO has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 25+ consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
FDO earned no Stars in this section, and had one Star deducted for a negative NPV MMA Diff. The negative NPV MMA Diff. means that on a NPV basis for every $1,000 invested in FDO you would earn $1,123 less than a MMA earning a 20-year average rate of 4.61%. If FDO grows its dividend at 9.1% per year, it will never equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: FDO is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. FDO has seen earnings decline in recent years in part as a result of difficult economic conditions for its core lower-income customers. To offset this the company has focused on new merchandising and productivity initiatives aimed at boosting sales and profit margins going forward.

Conclusion: FDO lost one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and lost one Star in the Dividend Income vs. MMA section for a net total of negative one Star. Since my scale bottoms out at zero, this quantitatively ranks FDO as a 0 Star-Avoid stock.

Using my D4L-PreScreen.xls model, I determined the share price would have to drop to $15.68 before FDO's NPV MMA Diff. increases to the $3,000 NPV MMA Diff. I like to see. At that price FDO would yield 3.06%. In short, FDO is overvalued and not a good dividend investment at this time. Thus, I won't be buying FDO any time soon.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I did not own shares of FDO (0.0% of my Income Portfolio).

What are your thoughts on FDO?

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