Is Tractor Supply Stock A Buy?

Specialty retailer Tractor Supply Company has consistently rewarded its shareholders through share repurchases and dividend payments. Moreover, the company’s shares have significantly outperformed the broader market this year, so is it time to buy?

With a market cap of over $28 billion, Tractor Supply Company (NASDAQ:TSCO) has rapidly expanded its footprint to become the largest rural lifestyle retailer in the U.S., ranking #291 on the Fortune 500 list.

Moreover, last month, the company was recognized as the 2024 winner of a CIO 100 Award by Foundry’s CIO for its cutting-edge project that utilizes generative AI capabilities to boost customer services.

As of December 30, 2023, Tractor Supply operated 2216 stores and 198 Petsense stores in 49 and 23 states, respectively.

In addition to high brand loyalty that keeps customers returning, Tractor Supply’s annual dividend payments keep shareholders invested.

The combination of happy customers and shareholders have led to shares soaring by over 21% year-to-date, beating the broader market proxy SPDR® S&P 500 ETF Trust’s (NYSEARCA:SPY) 10% increase. So, what’s the secret sauce behind the company’s success?

Is Tractor Supply Company Growing?

Tractor Supply’s revenue notably declined in the final quarter after experiencing strong growth in the three consecutive quarters of fiscal year 2023,

For the fourth quarter of 2023, the company reported net sales of $3.66 billion, reflecting an 8.7% year-over-year decline, which was primarily due to lower comparable store sales. Meanwhile, the company’s earnings per share reached $2.28, a decline of 6.2% year-over-year. 

Tractor Supply’s fiscal 2023 fourth quarter comparable store sales dropped by 4.2% compared to last year, which was a disappointment relative to the 8.6% rise in Q4 2022. Gross profit also fell by 5.2% on a YoY basis, reaching $1.29 billion. 

On the other hand, the company’s gross margin improved by 129 basis points to 35.3% from 34% in the prior year’s fourth quarter due to lower transportation costs and improvements in product cost management.

At the end of 2023, the company’s cash and cash equivalents stood at $397.07 million, up from $202.50 million as of December 31, 2022, an impressive rise.

During Q4, the company opened 19 new stores and 3 new Petsense stores. In the coming year, management plans to open about 80 stores and 10 to 15 new Petsense stores. As a result, capital expenditures are forecast to reach between $625 and $700 million in fiscal year 2024.

One notably point for shareholders is that share repurchases are estimated to range from $575 to $625 million, and will act as a cushion under the share price as a result.

During the quarter, Tractor Supply repurchased nearly 500,000 shares for approximately $110.40 million while also paying quarterly dividends totaling $111.40 million.

Despite the company’s slowing growth, Tractor Supply is still growing, as evidenced by its increasing store count, which should support shareholder optimism that the company’s ambitious plans for future growth will translate to impressive financials for some time to come. 

How Attractive and Sustainable Is The Dividend?

Despite a less-than-stellar financial performance in the fourth quarter, last month, the company paid its shareholders a quarterly dividend of $1.10 per share, marking a 7% rise from the previous quarterly dividend of $1.03 per share. Its forward annual dividend of $4.40 translates to a 1.68% yield on the prevailing price level.

Furthermore, the company holds a remarkable track record of 15 years of consecutive dividend growth, thanks to its steady cash flow streams.

Over the past three and five years, Tractor Supply’s dividend payouts have grown at CAGRs of roughly 36% and 27.6%, respectively. The company maintains a healthy dividend payout ratio of over 40%, retaining ample earnings for future growth endeavors and improving operational efficiency. 

While Tractor Supply’s profit decline and expansion plans revealed in the latest quarterly report could strain its potential to grow its dividend payments, the company could very well maintain its payouts thanks to its liquidity and steady cash flow.

Is Tractor Supply Stock a Buy?

According to analysts, Tractor Supply is more than fairly valued at this time with 3.5% downside risk to fair value of $243.49 per share.

Overall analyst ratings for Tractor Supply reveal a neutral-to-positive view. Out of 27 analysts covering the stock, 11 have recommended buying it, and 15 rate it as a Hold.

There are reasons to remain bullish long-term, even if the share price is currently pricing in good news. For example, Tractor Supply has gone above and beyond to establish solid brand loyalty among its customers through notable investments in technology that are solidifying its competitive advantages.

And the company is receiving broad commendations. An example of this is Tractor Supply earned the top position in customer satisfaction in the specialty retailer category of the American Customer Satisfaction Index (ACSI®) Retail and Consumer Shipping Study 2023-2024, which measures over 400 companies in more than 40 industries and 10 economic sectors.

Considering the company’s large growth potential and solid brand loyalty, TSCO’s premium valuation and forward non-GAAP price-to-earnings (P/E) ratio of 25.59x may in fact be quite reasonable and well-deserved.

Over the long-term, Tractor Supply shareholders are likely to see future gains accrue, even if short-term a pullback may be warranted based on an elevated valuation.

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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.