DEAR MR. BERKO: My broker is excitingly enthusiastic about Dollar Tree because of its possible pending merger with Family Dollar Stores. He thinks the shares could trade at more than $100 in two years. He wants me to sell my Boeing and Wal-Mart to buy 400 shares of Dollar Tree. Please give me your opinion on this stock. – BW, Joliet, Ill.
DEAR BW: Well, it seems Dollar Tree will be outbid by Dollar General. And I’m pleased because Dollar Tree (DLTR-$56) and Family Dollar Stores (FDO-$79) have two very different marketing philosophies. And management at both companies would be at loggerheads trying to establish dominance.
Back in August 2013, when the Dow Jones industrial average was at 15,300, I recommended the $8.5 billion DLTR at $55 a share. But though the Dow has risen by nearly 2,000 points, DLTR hasn’t budged from that recommended price. However, in the past dozen months, DLTR has opened 403 new stores, increased cash flow by 11 percent, grown revenues by 9 percent, improved profit margins to 6.9 percent and used $600 million of its cash to repurchase 13 million DLTR shares.
And as I said, the ill-fated FDO deal looks like a blessing in disguise because the two companies’ management personalities are as different as cheese and chalk. Everything at DLTR is a buck or less, whereas many prices at FDO are priced the same as Wal-Mart or Kroger. So far, only the lawyers are making money, charging an obscene $1,200 an hour to obfuscate the language in the merger. Meanwhile, Wal-Mart, with dinky net profit margins of 3.4 percent and tepid revenue growth, has recognized a change in customer demographics. DLTR – with its bargain-basement prices, shorter lines and very convenient locations closer to shoppers’ homes – appeals more to cash-strapped consumers than Wal-Mart or FDO or Dollar General. DLTR’s having smaller package sizes and all merchandise be a buck or less fits snugly into the budgets of a growing number of consumers who are living paycheck to paycheck.
And I enjoy traipsing the aisles of the DLTR that’s several miles from my office. I’ll usually leave that store with a tube of Colgate, a pack of batteries or a mix of office supplies – and sometimes a smiley balloon for my wife. Several weeks ago, I bought six 4-ounce frozen rib-eye steaks for a buck each. They weren’t Ruth’s Chris quality, but after cooking them on the gas grill, I’d buy a dozen more in a heartbeat. And when a friend recently entered a hospital for an extended stay, I purchased 30 “get well” cards (mailing one a day) for 50 cents each. It doesn’t make sense to spend $65 for school supplies at Walgreens, Target or Staples when the same quantity and quality of merchandise can be bought for $12 at DLTR. Just imagine the tens of billions of dollars the government could save if Congress had the guts to require that every food stamp recipient shop only at DLTR. A reader told me a couple of years ago that she shops for her family of five at a DLTR every two weeks and spends under $50. And though the peas are not Le Sueur sweet and the private brands may not be packaged brightly, the food products are darn good.
DLTR has become a competitive threat to Wal-Mart Stores (WMT-$77) as the number of U.S. shoppers visiting a WMT at least once a month has been declining for the past seven years. So I don’t have a problem if you decide to sell WMT to purchase DLTR. I think there’s slower growth for the WMT future. Consumers are beginning to recognize that their household dollar stretches three to four times further at a DLTR format than at Kroger, Safeway or even WMT. However, don’t sell your Boeing. You should keep it (see my July column about it) for exceptional long-term principal, revenue and income growth – plus a superb 2.4 percent dividend, which should increase nicely each year. And as long as there is a war somewhere in the world, Boeing (BA-$128) will be there with planes, weapons, missiles, guidance systems and all the other stuff making war so wonderfully profitable with your tax dollars.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.