Dollar General: A Hidden Gem Among Cheap Food Stocks

As an investor, you're always on the lookout for undervalued stocks that can provide a solid return on investment. One such stock that has caught the attention of hedge funds and analysts alike is dollar general corporation (DG). But is dollar general a cheap food stock worth buying? Let's dive into the data and find out.



Undervalued Stock with Strong Fundamentals

Dollar General's current valuation is 11x projected 2025 earnings, which is significantly lower than its historical averages and industry peers. Historically, Dollar General's P/E ratio has ranged from 12.24 to 17.03, with an average of 14.15. In comparison, the discount store industry's average P/E ratio is around 15.5. This indicates that Dollar General's current valuation is relatively low compared to its historical averages and industry peers. Additionally, Dollar General's current P/E ratio is lower than the broader market's average P/E ratio of around 18.0. Therefore, based on historical averages and industry comparisons, Dollar General's current valuation of 11x projected 2025 earnings suggests that the stock may be undervalued.

Sustainable Growth Drivers

Dollar General's earnings growth is primarily driven by its expansion strategy, cost management, and private label products. These factors have contributed to the company's consistent earnings growth over the years.

1. Expansion Strategy: Dollar General has been expanding its store footprint, opening new stores in rural and urban areas. As of October 28, 2022, the company operated 18,818 stores in 47 states. This expansion strategy allows Dollar General to reach a broader customer base and increase its revenue. For instance, in 2022, the company opened 1,000 new stores, contributing to its revenue growth of 10.59% compared to the previous year.
2. Cost Management: Dollar General has been effective in managing its costs, which has helped maintain its profit margins. The company focuses on reducing expenses and improving operational efficiency. For example, in 2022, the company's gross margin was 30.2%, and its operating margin was 7.9%, demonstrating its ability to control costs.
3. Private Label Products: Dollar General's private label products, such as Good & Smart, Clover Valley, and Smart & Simple, have been instrumental in driving earnings growth. These products offer higher margins than national brands and cater to price-sensitive customers. In 2022, private label sales accounted for approximately 35% of the company's total sales.

These growth drivers are sustainable in the long term, as they are part of Dollar General's core strategy. The company's expansion into new markets, focus on cost management, and continued investment in private label products are expected to contribute to its earnings growth in the coming years.



Dividend History and Payout Ratio

Dollar General's dividend history and payout ratio can also influence its attractiveness as a cheap food stock for income-oriented investors. The company has consistently increased its dividend over the years, indicating a commitment to returning value to shareholders. From 2018 to 2023, the dividend per share has grown from $2.24 to $2.495, representing an increase of 11.31% over this period. This steady growth in dividends suggests that the company is generating sufficient cash flow to support and grow its payouts.

The current payout ratio of 3.23% is relatively low compared to the company's historical average and the industry average. A lower payout ratio indicates that the company is retaining more of its earnings for reinvestment in the business, which can drive future growth. However, it also means that the dividend yield is lower compared to other stocks with higher payout ratios. As of March 2, 2025, Dollar General's dividend yield is approximately 1.72% (calculated as the annual dividend per share divided by the stock price). While this yield is lower than some other income-oriented stocks, it is still competitive within the discount store industry and offers a stable source of income for investors.



In conclusion, Dollar General Corporation (DG) is a cheap food stock worth considering for income-oriented investors. Its undervalued stock price, strong fundamentals, sustainable growth drivers, and consistent dividend history make it an attractive investment option. As hedge funds and analysts continue to recognize the company's potential, it's clear that Dollar General is a stock to watch in the cheap food stock category.