Leave your political ideology at the door because we are dealing in raw facts today. The use of government assistance to pay for food is in overdrive, something Wal-Mart (WMT) mentioned in its earnings call this week, triggering a flashback for this former free school-lunch recipient. Wal-Mart neglected to slip such a comment into earnings calls the past two years, so the comment suggests an accelerating trend.
There is a way to profit from the sluggish U.S. economy, and Warren Buffett, the Oracle of Omaha, has found it. Berkshire Hathaway (BRK.B) drove a stake into the ground by scooping up a piece of Dollar General (DG) recently.
Dollar General gets 71.6% of its sales from consumables, the most in the dollar-store group -- Dollar Tree (DLTR) gets 49.5% and Family Dollar (FDO) gets 65.1%. Buffett made a great bet on the increased use of so-called "food stamps" in the U.S. Since Dollar General structurally sells more food, it should benefit disproportionately over the sector.
Want to hear a zany thought? Government dollars are essentially being funneled back into the pockets of a man with an estimated wealth of $50 billion, the third richest in the world behind his pal Bill Gates and Mexico's Carlos Slim. How? For each swipe of a government-issued EBT card at Dollar General, it represents a profitable transaction that will add up to strong earnings growth and a higher stock price.
Sick, jaded world isn't it? Welcome to the capitalist system, baby.
Approximately 3500 Dollar Tree stores accept EBT cards. Dollar General racks up roughly 5% of its sales from the government's extended hand. Family Dollar began accepting EBT cards in most of its stores in 2009. The number of Americans utilizing the government's Supplemental Nutrition Assistance Program (SNAP) reached an all-time high of 45.8 million in May, up 12% from a year ago and 34% higher than two years ago. That means nearly 15% of the U.S. population relies on EBT cards to buy food. To qualify, an individual's income can't exceed $1174 a month or $14,088 a year.
These are the sobering statistics. And they accompany countless stories of program abuse, e.g., swiping an EBT card at a grocery store to purchase a juicy filet mignon instead of ground beef. By aggressively adding refrigerated coolers to stores to tap into the EBT transaction wave, dollar stores have become beehives of government dollar activity.
Buffett not only made a wager on a permanent underclass, but also on an entire other group of people with greater spending power who have financial and mental bruises from the Great Recession. I am referring to Baby Boomers, a class likely to be frugal due to 401(k) hits and inevitable cuts in Social Security and Medicare. They are physically fatigued after years of drop-dead work since Woodstock ( the one in 1969) ended. That physical fatigue plays right into the hands of urban dollar stores: parents moving in with kids who, because of economic upheaval, have been forced to look at home ownership from afar. Approximately 70% of Dollar Generals are located in areas with populations of less than 20,000.
Donkeys, elephants, tea drinkers and free spirits need to put their politics aside and pay attention the new paradigm. Warren Buffett did.