Dollar Tree's Wrong Move

 | Oct 07, 2011 | 2:22 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

dltr

One of my favorite companies did something I am bummed about today and I gotta squawk about it.

The company is Dollar Tree (DLTR) and it announced a $1.5 billion buyback that I think is a not-so-hot use of capital up here after a big run.

Typically I don't want to criticize winners. I think the dollar store cohort has long been one of favorites as part of the barbell strategy of favoring the rich and the struggling as befits our rocky economy. Dollar Tree has been an outstanding stock, up 38% year to date.

Plus, it is a terrific store. My Dollar Tree in Philadelphia has become a mainstay of my existence as I like candy and it has the best candy aisle I have ever seen. I get everything from Cow Tales to Bonamo Turkish Taffy to Goetz Caramels there, not to mention the obligatory runts, and you can eat off the floor of the place although I don't know why anyone would eat off the floor of a dollar store or any floor for that matter.

Plus, given that the company has bought in $1.9 billion worth of stock in the last eight years including more than $700 million in the last year and a half you could say the strategy's working.

But my issue is twofold. First, the stock has had a magnificent run. So why would you buy up here? Stocks aren't chronically undervalued. It is not like the market has been slighting the stock. Just the opposite. While it has 17% growth, the stock's selling at a price-to-earnings multiple of 21, which doesn't make it cheap vs. the rest of the market.

Why not wait and be opportunistic?

We have a difficult market. If the stock doesn't come in, use the free cash flow to build more stores and challenge the other dollar stores which, frankly, just aren't as nice. Second, and more importantly, why not pay a dividend? Why benefit departing shareholders with a buyback and not the existing shareholders with what could be a pretty bountiful payout that can be reinvested and build loyalty among investors? Buybacks don't build loyalty.

Look, I can see authorizing this buyback if the stock were severely undervalued in a very obvious way. But when the S&P is down high single digits for the year and your stock is up 38%? That's empirically not the right thing to do.

And if they returned the money to shareholders via a dividend that would be a sign to me that they are committed to super-long-term growth and believe in themselves. That's something that a buyback, which can be suspended at any time, doesn't do for you.

So, hats off to Dollar Tree for executing terrifically and stocking the best candy aisle around, which include the elusive purple Mike & Ikes, but come on. Pay us a dividend and we would be even more thrilled to recommend your stock and not just your stores to Cramericans everywhere.

Columnist Conversations

TrueCar, Inc. (TrueCar) is a data-driven online platform operating a technology infrastructure, powered by dat...
Financial Planning magazine reports that... The Internal Revenue Service is considering regulations to limit t...
MMM is rolling over. Early last week the stock began to fall out of a steep bull channel before retestin...
Higher tariffs are a sign of increased floating inventories that will be available for immediate withdrawal on...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.