Receiving a discount is a joyous occasion. I don’t know too many people that would refuse to pay less for something if they could. Most of the people that want to pay more for things, simply want to boost their ego by flaunting their income. Personally, I think its foolish and isn’t sustainable to refuse a discount and flaunt money. Others want to avoid the stigma of being less fortunate. For those who like to save money, there are a number of stores that offer huge discounts on everyday purchases. One store that my wife and I like to shop at is Family Dollar (FDO, Financial).
Family Dollar is a discount store offering low and middle income family huge discounts on every day purchases such as groceries, to space heaters and motor oil. Family Dollar has been committed to its customers, and has created value for them. But what about investors? It’s one thing to be a patron of a business but a completely different thing to be an owner and investor.
The discount retail industry is one of the most competitive industries, and with a market cap around $7 billion, FDO is one of the smaller players in this arena. However this doesn’t mean that FDO can’t compete or add value to shareholders. We’ll just have to take a closer look.
FDO is a fast growing retailer, and has thirty seven years of consecutive dividend increases. With a current yield of 1.9%, Family Dollar seems to be adding value to its shareholders as well. But we’ll have to look at the cash flow statement to see how this growth is being fueled. One of the beautiful aspects of the cash flow statement is that it clearly shows how a company is generating money. It shows whether the business is doing so through its regular business activities (cash flow from operations), from its investments (cash flow from investing), or from debt (cash flow from financing).
When we look at the cash flow statement, we see that FDO’s cash flow from operations has dropped significantly from $325 million, to $253 million from June 2013 to May 2014. Growth could be slowing as capital expenditures decreased from $599 million to $307 million. Short term debt increased by almost $200 million. Overall, net cash declined from$31 million to $22.7 million. This tells me that compared to last year’s quarter, business has slowed, investments in future growth has slowed and debt seems to be financing operations and probably dividends. Lets look at a chart to see how the company’s cash relates to its dividends.
Looking at the chart, we see that FDO is a Dividend Aristocrat with increasing and consistent dividends. But at what cost? FDO’s free cash flow per share has been very inconsistent, and even negative many times. We can also use Guru Focus’ charts to view a company’s cash flor for dividends. This invaluable tool helps us see what a company can pay us in dividends from the cash flow it generates. We see that FDO has negative $35 million cash flow for dividends. In order to continue paying dividends and funding its operations, it seems as if FDO would need to continue borrowing funds.
FDO is a great company to be a patron of. My wife and I will continue to take advantage of the value it creates for us as customers. However with a P/B of 4.2, and a negative cash flow for dividends, I simply don’t see the value of being an investor in Family Dollar.
