How a publicly traded company spends its cash can be a good sign of what the management and board mermbers expect to happen. For example, if a company plunks down millions of dollars to acquire another company, it suggests that management thinks the pick-up will eventually add to earnings or in some way benefit the company.
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Similarly, when a company purchases its stock or authorizes a share repurchase, that sends a sign, too, that it thinks the shares in question are a good value. With that in mind, today I'd like to touch on Family Dollar (NYSE: FDO) in greater detail.
FDO's Board Gives The Big Nod
This past week, the company's board authorized buying an additional $400 million of stock. In that release its chief executive said, "We continue to believe that our stock is an attractive investment and that our share repurchase program builds value for shareholders."
I find this particularly interesting for a couple of reasons. Again, if the board didn't have a fairly high level of confidence in the future, a share repurchase is not something it would do or entertain at all. Also, I find the authorization particularly interesting because the stock trades north of $30, which is toward the higher end of its 52-week range.
Of course, there is no guarantee the company will actually purchase stock at these levels, as such purchases depend on market conditions. But stepping in here would send a big sign that there is still potential solid upside to this story.
Other Reasons FDO Makes 'Cents'
I think that shoppers could likely become more conservative in coming months in their spending habits, and if I'm correct, it would be good for companies like Family Dollar, which sells a large amount of merchandise at low prices.
There are other ways to take advantage of the cautious consumer, such as avoiding or standing clear of most higher end/higher priced retailers and look instead at discounters such as the Wal-Marts (NYSE: WMT) and Targets (NYSE: TGT) of the world. Note that it was reported earlier in November that Berkshire Hathaway (NYSE: BRK.A) had been a buyer of Wal-Mart stocks, which I think says a great deal about where the Oracle of Omaha thinks the shares may be headed down the line. In addition, Target notably crushed the third-quarter estimate.
Incidentally, as evidence that Americans are being frugal, check out Sears' (Nasdaq: SHLD) Q3 earnings release. In it it's interesting to note that Kmart, which Sears has under its umbrella, saw its comps for the quarter increase 0.5%.
Drilling down into FDO, it is also interesting that the company has turned in two straight earnings beats, which raises some attention levels. It is trading at 13.3 times this year's estimate, and that seems attractive as the company is expected to grow earnings at more than 10% from the current year to next year. Actually, I feel that it can exceed the current 48 cents per share estimate for the Q3. If that happens, the stock could move higher. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)
Bottom Line
The share repurchase authorization by FDO's board is a good sign. I also think the company has a good chance because of a general unwillingness by many to spend money on goods. It trades at an attractive price to earnings multiple, which is another plus.
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