Regardless of your experience with investing, one big lesson that is worth remembering comes from the growth investing legend Peter Lynch. His quote is as follows: “In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.”
The good news is that you don’t always have to be right to be a successful investor. This is because a few winning investments can more than make up for the times that you’re wrong. For instance, a $5,000 investment in the convenience store operator Casey’s General Stores (CASY -0.37%) made 10 years ago would now be worth $19,500 with dividends reinvested. That meaningfully outperformed the S&P 500 index, which turned the same initial investment amount into $16,400 with dividends reinvested over that time.
But is the stock still a buy for investors seeking capital appreciation and dividend growth? Let’s dig into Casey’s fundamentals and valuation to find out.
A steadily growing business
In rural towns, sometimes the nearest store with everyday items that you need is a lengthy drive away. Since its first store opening in 1968 in Boone, Iowa, Casey’s General Store has been selling customers grocery items, freshly prepared food items (e.g., donuts, subs and sandwiches, and made-from-scratch pizzas), and self-service fuel. With roughly 50% of its 2,500 stores in 16 U.S. states located in towns with 5,000 people or less, the company is staying true to the corporate roots that have made it a success.
Casey’s total revenue surged 16.5% higher year over year to $15.1 billion in its fiscal year ended April 30, 2023. This was driven by strength throughout the business, including double-digit revenue growth in the fuel, grocery and general merchandise, and prepared food and dispensed beverage product categories during the fiscal year. Considering that 80% of Casey’s guests agree that the company’s stores offer good value for the money, it shouldn’t be a surprise that it greatly benefits from repeat business.
The Ankeny, Iowa-based company recorded $11.91 in diluted earnings per share (EPS) for the fiscal year, which was up 30.9% over the year-ago period. Thanks to tight cost management, Casey’s expenses grew at a slower rate than total revenue in the fiscal year. This led the company’s net margin to expand by over 30 basis points to just shy of 3% during the fiscal year. That is how Casey’s diluted EPS growth far outpaced its total revenue growth for the fiscal year.
Management anticipates that between the current fiscal year and 2026, the company will open or acquire another 350 stores. Analysts’ confidence in Casey’s explains why the company’s annual diluted EPS growth consensus is 10.8% for the next five years.
Image source: Getty Images.
The company’s dividend growth track record is robust
Up against the S&P 500 index’s 1.5% dividend yield, Casey’s 0.7% yield won’t catch the attention of investors solely focused on starting dividend income. But having cumulatively upped its quarterly dividend per share by nearly 140% in the past 10 years, the stock could be a savvy pick for dividend growth investors.
CASY Dividend data by YCharts
That’s because the company’s dividend payout ratio is positioned to come in at around 16% for the current fiscal year set to end next April. Such a modest payout ratio leaves Casey’s with more than enough capital for business expansion through store openings and acquisition activity, debt repayment, and further dividend hikes. That is why I would expect the company to hand out more dividend boosts to shareholders like the most recent 13.2% raise announced in June.
Casey’s stock isn’t unreasonably valued
Shares of Casey’s have gained 13% in the past 12 months. Yet, the stock’s forward price-to-earnings (P/E) ratio of 19.2 is not that excessive relative to the specialty retail industry average forward P/E ratio of 15.3. Taking Casey’s reputation for strong capital appreciation into account, this valuation premium is well-deserved in my opinion. That’s why the stock is arguably a buy for dividend growth investors at the current $240 share price.
