Is Dollar General (DG) the Undervalued Defensive Stock for 2025?

As we approach 2025, investors are on the hunt for undervalued stocks that can provide a defensive position in their portfolios. One company that stands out as a potential candidate is Dollar General (DG), the discount retailer known for its low prices and wide range of products. But is DG truly undervalued, or is the market's skepticism warranted? Let's dive into the data and find out.



Undervalued Metrics

Dollar General's valuation metrics suggest that the stock may be undervalued compared to its peers and historical averages. Some key metrics to consider include:

1. Price-to-Earnings (P/E) Ratio: DG's forward P/E ratio of 11.61 is lower than its historical average of 12.92x and the industry average of 12.92x. This indicates that the stock may be relatively undervalued.
2. Price-to-Sales (P/S) Ratio: DG's P/S ratio of 0.35 is lower than its historical average of 0.41x and the industry average of 0.41x. This suggests that the stock may be trading at a discount compared to its peers.
3. Dividend Yield: DG's dividend yield of 3.45% is higher than the industry average of 2.5% and the 10-year Treasury yield of 2.5%. This indicates that DG's dividend is more attractive compared to the broader market.
4. Free Cash Flow (FCF) Yield: DG's FCF yield of 10.95% is higher than the industry average of 5.63% and the 10-year Treasury yield of 2.5%. This suggests that DG's FCF is relatively high compared to its peers.



Growth and Profitability

Despite the undervalued metrics, some investors may be concerned about DG's growth prospects and profitability. However, DG's recent financial performance and analyst forecasts suggest that the company is well-positioned for future growth:

1. Revenue Growth: DG's revenue growth rate is expected to be 4.5% per annum, which is in line with the consumer retailing sector's earnings growth rate of 10.4%.
2. Earnings Growth: DG's EPS growth rate is expected to be 7.1% per annum, which is higher than the consumer retailing sector's earnings growth rate of 10.4%.
3. Return on Equity (ROE): DG's future return on equity is forecast to be 16.6% in 3 years, which is higher than the industry average of 10.4%.



Risks and Challenges

While DG appears undervalued based on its valuation metrics and growth prospects, investors should be aware of the risks and challenges facing the company:

1. Debt Load: DG's debt-to-equity ratio of 2.39 is higher than its peers, which could weigh on the stock's performance if interest rates rise.
2. Margin Erosion: DG has faced margin erosion in recent years, which could impact its profitability if not addressed.
3. Competition: DG faces intense competition from other discount retailers, such as Walmart and Amazon, which could impact its market share and profitability.

Conclusion

Dollar General's undervalued valuation metrics, combined with its strong growth prospects and profitability, suggest that the stock may be an attractive investment opportunity for 2025. However, investors should be aware of the risks and challenges facing the company, such as its debt load, margin erosion, and intense competition. By carefully considering these factors, investors can make an informed decision about whether DG is the right defensive stock for their portfolios.