1 Top Dividend Stock In Agriculture Sector

Tractor Supply Company (NASDAQ:TSCO) is a leading retailer of outdoor equipment, farm goods, lawn and garden supplies and home hardware.

Although it is often overlooked by investors, the company has roared higher to an impressive market cap of over $23 billion. Today, the stock has emerged as a strong candidate for dividend growth investors to buy and hold for long-term income. Is Tractor Supply a good stock to hold for the long term? We investigate.

Is Tractor Supply Dividend Yield Good?

Tractor Supply Company currently pays a dividend of $4.12 per share annually, equating to a yield of 1.9 percent, which is moderately attractive.

The real story of the company’s dividend, however, is its enormous growth over the last several years. The 10-year compounded annual growth rate for Tractor Supply Company’s dividend is nearly 25 percent, while the 3-year rate is over 40 percent.

The company has raised its dividends for 14 consecutive years, a reasonably good track record in light of the variety of market conditions over that period.

What’s more, Tractor Supply still seems to have a great deal of room for further dividend growth. The payout ratio is currently 42.4 percent, so management has a decent amount of latitude to increase dividends even without significantly higher earnings.

While the growth rate is expected to slow over the next three years, analysts still project dividend growth of over 6 percent.

Tractor Supply Reports Strong Results

Even amid what has been a difficult year for many retailers, Tractor Supply has delivered strong results.

The company’s net sales increased 9.1 percent, despite what management acknowledged was weaker demand for seasonal products. Earnings were flat at $1.65 per share, an impressive feat given the cost increases and narrowing margins faced by retailers in the last year.

To better understand TSCO’s success, though, we need to look back over the last several years. Since 2010, the company’s 12-month revenues have skyrocketed from $3.2 billion to well over $14 billion. Over the same period, annual earnings per diluted share have risen from $0.82 to $9.71.

Although Tractor Supply Company is maturing and will likely not be able to replicate this exponential growth, it’s clear that management has been successful in building value over very long periods of time.

Tractor Supply Company’s gross profit margin in the most recent quarter was 35.5 percent, up slightly from the same period in 2022.

Net margin contracted from 6.2 to 5.5 percent, a minor drop considering the macroeconomic difficulties of the past year. On a trailing 12-month basis, Tractor Supply also boasts an incredibly 55.5 percent return on equity.

Tractor Supply is also pursuing a long-term expansion plan focused on growing digital sales, increasing store counts and maximizing the value of existing locations. Over the long term, the company plans to expand to 2,500 locations. As of the last quarterly report, the company operated a total of 2,164 stores.

Is Tractor Supply a Good Stock To Buy?

In addition to being a good dividend stock to own for the long term, Tractor Supply Company shares may have considerable upside potential over the next 12 months. 30 analyst have placed a consensus fair value of $254.50 per share on the firm.

Based on the most recent price, this would imply an upside of 18 percent. Another encouraging sign for investors is the fact that the lowest price forecast for the stock is $218, marginally above the current share price, suggesting that Tractor Supply Company’s short-term risk-to-reward ratio is weighted in favor of gains and against losses.

Despite its apparent upside, Tractor Supply Company does not seem to be significantly undervalued. Indeed at about 20.6 times forward earnings and 16.6 times cash flow, Tractor Supply appears to be fairly valued overall. The stock trades about 2 times its expected earnings growth, which is normally a sign of overvaluation. In light of TSCO’s considerable potential for long-term future growth, however, this metric isn’t particularly concerning.

Earnings Growth In Jeopardy

Although the company has navigated it well so far, sustained inflation could keep pressure on Tractor Supply Company’s net margins and make it difficult to achieve earnings growth in the short term.

Likewise, inflationary pressures could suppress consumer spending, a problem that Tractor Supply Company may already be encountering. In the most recent quarter, comparable store sales rose just 2.1 percent year-over-year.

Tractor Supply Company may also lack a durable moat. Competition from other hardware and seasonal stores, including Lowe’s and Home Depot, could put downward pressure on the company’s growth.

A final hazard investors in Tractor Supply Company should be aware of is its exposure to higher labor costs. Given the company’s labor-heavy retail model, it is susceptible to both labor shortages and rising wages.

While this doesn’t seem to have negatively affected the company so far, the ongoing tight labor market could present problems as it attempts to increase its footprint.

Should You Add Tractor Supply Company to Your Portfolio?

Ultimately, Tractor Supply Company appears to be a strong potential buy for investors seeking dividend income and long-term dividend growth. While the company carries the risks widely associated with the broader retail sector, management has proven itself capable of navigating a challenging market to deliver positive results for investors. The company is also clearly committed to returning cash to shareholders through dividends,

Another potential positive indicator for TSCO’s future is the high level of institutional ownership of the stock. Nearly 85 percent of the company is owned by institutional investors. This high level of institutional ownership reflects broad confidence in the company among professional investors.

It’s worth noting that Tractor Supply Company could be a versatile stock for a wide range of investment strategies. In addition to being a good dividend growth stock, TSCO could also track or outperform the market in terms of price. As such, the stock may also be a good fit for somewhat conservative growth investors.

Although TSCO likely won’t deliver the ultra-high returns that more volatile tech stocks can, the stock appears to be a fairly low-risk and appropriately valued asset that could produce excellent long-term total returns.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.