Would Benjamin Graham Have Invested in Dollar Tree (DLTR)?

Dollar Tree does not have the profile of a defensive investment based on the requirements of Ben Graham. The Department Store firm may nonetheless be of interest to more risk-oriented investors who have a solid thesis on the company's future growth. At Market Inference, we remain agnostic as to such further developments, and prefer to use a company's past track record as the bellwether for future potential gains.

Dollar Tree Is Probably Overvalued

Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:

√(22.5 * 6 year average earnings per share (3.75) * 6 year average book value per share (39.56) = $77.72

At today's price of $124.34 per share, Dollar Tree is now trading 60.0% above the maximum price that Graham would have wanted to pay for the stock.

Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.

Positive Retained Earnings From 2010 To 2023, No Dividend Record, and Eps Growth In Excess Of Graham'S Requirements

Ben Graham wrote that an investment in a company with a record of positive retained earnings could contribute significantly to the margin of safety. Dollar Tree had positive retained earnings from 2010 to 2023 with an average of $3.23 Billion over this period.

Another one of Graham's requirements is for a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.To determine Dollar Tree's EPS growth over time, we will average out its EPS for 2009, 2010, and 2011, which were $0.51, $0.73, and $0.43 respectively. This gives us an average of $0.56 for the period of 2009 to 2011. Next, we compare this value with the average EPS reported in 2021, 2022, and 2023, which were $2.13, $5.80, and $7.21, for an average of $5.05. Now we see that Dollar Tree's EPS growth was 801.79% during this period, which satisfies Ben Graham's requirement.

We have no record of Dollar Tree offering a regular dividend.

Negative Current Asset to Liabilities Balance and an Average Current Ratio

Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Dollar Tree fails on both counts with a current ratio of 1.5 and a debt to net current asset ratio of -0.4.


According to Graham's analysis, Dollar Tree is likely a company of average quality, which does not offer a significant enough margin of safety for a risk averse investor.

2018-03-16 2019-03-27 2020-03-20 2021-03-16 2022-03-15 2023-03-10
Revenue (MM) $22,246 $22,823 $23,611 $25,509 $26,321 $28,332
Gross Margins 32.0% 30.0% 30.0% 31.0% 28.0% 32.0%
Operating Margins 9% 8% 7% 7% 7% 8%
Net Margins 8.0% -7.0% 4.0% 5.0% 5.0% 6.0%
Net Income (MM) $1,714 -$1,591 $827 $1,342 $1,328 $1,615
Net Interest Expense (MM) -$302 -$370 -$162 -$147 -$179 -$125
Depreciation & Amort. (MM) -$611 -$621 -$645 -$687 -$716 -$768
Earnings Per Share $7.21 -$6.66 $3.47 $5.65 $5.79 $7.04
EPS Growth n/a -192.37% 152.1% 62.82% 2.48% 21.59%
Diluted Shares (MM) 238 239 238 237 230 230
Free Cash Flow (MM) $2,142 $2,583 $2,890 $3,606 $2,451 $2,869
Capital Expenditures (MM) -$632 -$817 -$1,020 -$890 -$1,020 -$1,254
Net Current Assets (MM) -$4,574 -$3,565 -$9,050 -$8,360 -$8,394 -$7,904
Long Term Debt (MM) $4,862 $4,344 $3,522 $3,226 $3,417 $3,422
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.