Dollar General (DG) symbolizes everything people hate about America’s economy.
Progressives hate Dollar General because it cashes in on income inequality and wage stagnation. The Trumpists hate Dollar General because its shelves are stuffed with low-cost merchandise from China.
In particular, City Lab charges dollar stores thrive in the poorest of rural towns where there is no economic activity. In addition, dollar stores are often the only retailer left in devastated urban areas.
Additionally, Dollar General is a poster child for low wages. For example, Indeed.com claims associate managers at Dollar General make $9.76 an hour. Moreover, a manager on duty at Dollar General reportedly makes $9.09 an hour.
Dollar General (DG) Cashes in on Wage Stagnation
Not surprisingly, if you visit a depressed small town in Middle America, you will probably see a Dollar General. Indeed, Dollar General has a policy of avoiding prosperous communities and opening in depressed areas, The Guardian charges.
For instance, I found a Dollar General in the dismal community of Penrose, Colorado; where junkyards are the only thriving businesses. However, Dollar General is not present in the booming communities of Salida and Buena Vista, Colorado. Notably, Salida is about 64 miles up the highway from Penrose.
Unfortunately, there are many depressed communities in America for Dollar General (DG) to take advantage of. Plus, the purchasing power of average Americans has hardly budged since 1964.
In 1964, an average American generated $20.27 in purchasing power in 2018 dollars, Pew Research calculates. However, that number increased to $22.65 an hour in 2018.
Thus, the average American’s wage is only $2 over what it was in 1964 (when LBJ was in the White House). Yet, Americans have more expenses than ever before. For example, internet, cable television, wireless phone service, and higher healthcare costs, to name a few.
The Shrinking Middle Class is an Opportunity for Dollar General (DG)
Therefore, more and more Americans finance their pseudo-middle-class lifestyles by heading to the dollar store. For instance, the few dollars a woman saves on dishwasher soap; or TV dinners, at the dollar store, could help her purchase internet service.
In addition, Dollar General’s target market the lower class is growing. In fact, Pew estimates the lower class grew from 25% of Americans in 1971 to 29% in 2016. Hence, nearly one out of three Americans is a potential Dollar General customer.
Plus, the middle class shrank from 56% of Americans in 1991 to 52% of Americans in 2016, Pew Research calculates. However, the percentage of middle-class Americans grew slightly from 51% in 2011 to 52% in 2016.
Under these circumstances, it is easy to how Dollar General grew to over 15,000 stores in 44 states. A shrinking middle class and wage stagnation keep creating more customers for Dollar General (DG).
The Overpriced Dollar General (DG) stock shows everything wrong with America’s economy
Interestingly, Mr. Market likes Dollar General’s ethically questionable business model. For instance, Dollar General Corp (NYSE: DG) shares were trading at $98.85 on 24 December 2018.
To be fair, Dollar General is a good stock, on paper. For example, Dollar General made a gross profit of $1.895 billion on revenues of $6.417 billion during 4th Quarter 2018.
Hence Dollar General had a gross margin of 29.53% on November 2, 2018. Thus, Dollar General has a higher gross margin than Walmart (NYSE: WMT). To demonstrate, Walmart had a gross margin of 25.44% on 31 October 2018.
On the other hand, Walmart recorded a gross profit of $31.778 billion on $124.894 billion in revenues for 4th Quarter 2018. Therefore, Walmart’s revenues are 20 times those of Dollar General’s. Notably, Walmart is Dollar General’s most visible direct competitor.
How Much Money is Dollar General (DG) making?
Disturbingly, Dollar General (DG) is not making that much money off its business.
For instance, Dollar General records an operating income of $442.14 million and a net income of $334.14 million for 4th Quarter 2018. Nor is Dollar General generating that much cash. Dollar General records an operating cash flow of $416.83 million and a free cash flow of $237.37 million for 4th Quarter 2018.
Importantly, Dollar General (DG) has very little cash. For instance, Dollar General recorded $260.9 million in cash and equivalents on November 2, 2018.
On the other hand, Walmart recorded $9.174 billion in cash and equivalents on 31 October 2018. Thus, Dollar General’s biggest direct competitor $9.174 billion in cash to spend on things like robots and online retail.
Amazon is Dollar General’s (DG) most dangerous direct competitor
Moreover, Amazon (AMZN), Dollar General’s (DG) most dangerous direct competitor had $29.765 billion in short-term investments and cash on September 30, 2018.
Amazon is Dollar General’s most dangerous direct competitor because its distribution system (UPS, FedEx, USPS) reaches every place DG has a store. For instance, the UPS person comes to places like Penrose, Colorado, every business day.
A huge threat for Dollar General is that all the middle-and upper-class people in places like Penrose will do all their shopping at Amazon Prime. Thus, Dollar General will only serve the poorest customers.
How Amazon Go Threatens Dollar General (DG)
Moreover, Amazon is experimenting with Go, a no-cashier convenience store. The Amazon Go is a threat to Dollar General because they can adapt it to sell general merchandise. Hence, Amazon could open brick and mortar locations in small towns across America.
Amazon Go could undercut Dollar General’s low prices because it has lower labor costs. There are lower labor costs at Amazon because there are no cashiers.
Notably, small towns across America are full of empty storefronts. Thus there is a lot of low-cost retail space for Amazon to open Go stores in competition with Dollar General.
Plus, Amazon is developing a logistics network for all those Go stores. Amazon is ordering 20,000 Mercedes-Benz Sprinter vans from Daimler (OTC: DAI), The Seattle Times reports. The plan is to use those vans in Amazon’s delivery program, but the Everything Store could use the Sprinters to ship merchandise to Amazon Go stores.
Under these conditions, Dollar General is not Amazon proof. Instead, Dollar General could find itself in direct competition with Amazon on its home turf. Thus, Dollar General; like many more impressive retailers, is in danger from Amazon.
Dollar General (DG) is a poor Investment
Not surprisingly, I think Dollar General (DG) is a poor investment, despite its growing dividend.
On the positive side Dollar General is scheduling a 29¢ dividend for 22 January 2019. That dividend is up 3¢ from the 26¢ paid on 23 January 2018.
Dollar General’s investors enjoyed a dividend yield of 1.14%, an annualized payout of $1.16, and a payout ratio of 19% on 21 January 2018. Thus, Dollar General is fair dividend stock.
However, Walmart shareholders will collect a 52¢ dividend on 2 January 2019. Moreover, Walmart shareholders enjoyed a dividend yield of 2.38%, an annualized payout of 2.08, and a payout ratio of 43.2% on 21 December 2018. To add icing to the cake, Walmart has 43 years of recorded divided growth.
Dollar General (DG) is a microcosm of America’s economic problems
Hence, Walmart (WMT) is a far better dividend stock than Dollar General and it is cheaper. In fact, Walmart shares were trading at $85.82 on 24 December 2018.
Therefore, Dollar General (DG) is an overpriced stock. Hence, it displays another problem with America’s economy; overpriced assets. I would advise investors to stay away from Dollar General and investigate Walmart.
Walmart is a value investment while Dollar General is a microcosm of America’s economic problems. Avoiding Dollar General (DG) stock is a good way not to lose money. Those who invest in Dollar General will expose their portfolios to America’s economic problems.