Although the Nasdaq Composite Having risen nearly 13% in 2023, it’s still down nearly 27% from its peak set in November 2021. And this still puts it in bear market territory as it tries to recoup some of those losses.
What put pressure on stock prices? Fears of a possible recession – fueled by stubbornly high inflation and rapidly rising interest rates – are no doubt to blame. It would probably be a wise move for investors to find ways to protect their hard-earned savings in such an uncertain environment.
With that mental framework in mind, Dollar General (DG -0.77%) deserves a closer look because it’s a stock that can help make your portfolio recession-proof. Here’s why.
A sustainable business model
With trailing 12-month sales of $36.3 billion and a massive physical presence of 18,818 stores in 47 states across the country, Dollar General is a leading discount retailer in the United States. Stores offer merchandise suitable for repeat purchases, including grocery and beauty products, cleaning supplies, and seasonal items. Dollar General also sells popular products from well-known brands.
One of Dollar General’s key competitive strengths is its geographic advantage. Many stores are located in rural, low-income areas where it may be the only shopping destination in town. The company benefits from lower overheads and customer retention.
As weaker macro conditions weigh negatively on companies across the economy, Dollar General’s value proposition shines. As a little rival money tree, announced price increases for most of its products in late 2021 in response to inflationary pressures, Dollar General stalled. And while Dollar General only sells about 20% of its wares for $1 or less, that move (or lack of it) has undoubtedly helped attract budget-conscious consumers.
Management recently released some preliminary numbers for the most recent fiscal period (fourth quarter of 2022 ended February 3). They said the company posted 5.7% same-store sales growth in the quarter, down from a previous guidance of 6% to 7%. In addition, the management team expects diluted earnings per share (EPS) between $2.91 and $2.96, below the previous target of $3.15 to $3.30.
Its full-year 2023 sales guidance was lower than Wall Street had hoped. Winter Storm Elliott hurt business in the last quarter, particularly in December.
However, Dollar General’s ability to still generate revenue and earnings gains in this type of environment is impressive. And it indicates the company’s consistency and resilience. For example, during the Great Recession more than a decade ago, Dollar General posted annual revenue growth of 10.1% and 12.8% in fiscal years 2008 and 2009, respectively, a clear sign of its recession-proofing.
A successful investment
Over the past five years, Dollar General’s stock is up 135%, an impressive surge that slightly outperforms the stock S&P500‘s rate of return of 62% over the same period. Revenue increased from $23.5 billion in fiscal 2027 to $36.3 billion in the trailing 12-month period. And diluted earnings per share increased from $5.63 in fiscal 2017 to an expected $10.66 in fiscal 2022. This strong fundamental performance is further bolstered by a growing store footprint. In fact, Dollar General plans to open 1,050 new stores in fiscal 2023.
As of this writing, the shares are trading at a price-earnings ratio (P/E) of 21, which is slightly above the historical 10-year moving average valuation but consistent with the trailing 5-year moving average P/E. Given the company’s recession-proof characteristics, investors may be tempted to pay a small premium for Dollar General in the current uncertain macro environment.
According to Wall Street consensus analyst estimates, Dollar General is expected to grow revenue at a compound annual rate of 6.9% between fiscal years 2023 and 2027, with earnings per share growing at an annualized rate of 12. 5% will increase. These are steady and reliable gains that investors can count on as the thesis for this company is that it will continue to do what it has done throughout its long and successful history.
This makes Dollar General a profitable investment to put your money away now.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
