Casey’s General Stores: A Sleeper Dividend Growth Stock (NASDAQ:CASY)

Introduction

As a dividend investor, I have a mix of dividend producers and showers in my portfolio. While I expect all my holdings to reward me with stable and reliable dividends over the long term, I expect some to more than that. Hence why I like to call my stocks dividend and grower.

Rains, I expect no to minimal dividend increases for the foreseeable future. Along with my growers, I suspect they will reward me with large single to double digit increases in the near future.

Plus, it’s even better when you can collect them from bedroom stocks. One that qualifies as a sleeper dividend growth stock is Casey’s General Stores (NASDAQ: CASY). And in this article I discuss the company’s latest earnings, 2024 performance, outlook, and why this bedroom stock could be a great addition to your portfolio

Previous purchase rating

We last covered Casey’s General Stores in February in an article titled: A dividend grower worth owning for long-term investors. I came across the company while having a conversation with a family member. I decided to look into the company and was totally impressed with their fundamentals.

The market also seems to share the same sentiment as their share price has doubled the performance of the S&P, up nearly 22% from 9.58% at the time of writing. We discussed the company’s appeal when looking at their strong fundamentals, although they seemed to be less known to the average investor.

At the time, the company reported second-quarter earnings with a beat on profit and revenue in line with estimates. EPS came in at $4.24, while revenue was $4.06 billion.

Despite earnings falling from $4.52 in the previous quarter, CASY managed to beat analysts’ estimates by a hefty $0.37. Revenues managed to grow by 4.9% compared to the previous quarter. Their strong performance propelled the stock price above my then price target of $311.

We also discussed the company’s attractive and growing dividend, which was well covered by a free cash flow payout ratio of just 11%. And we’ll dig into this later.

FY performance

Despite several companies facing headwinds from weaker consumers and higher expenses, Casey’s continued to perform exceptionally well, showing why the company is a great stock to own for the long term.

During Q4 earnings in June, the convenience operator beat EPS estimates by $0.64. Additionally, they managed to beat revenue estimates by a solid $130 million. Both came in at $2.34 billion and $3.6 billion, respectively.

Highlighting their preference for small town locations; 72% of their stores are in cities with a population of 20,000 or less, proving to be a great market to establish business. EPS and revenue were up from $2.33 and $3.33 billion, respectively, in the previous quarter.

And for the full year, EPS rose by double digits to $13.43 from $11.91. This was driven by solid performance in same-store sales and a 12.3% increase in net income. This was $502 million, up from $447 million in 2023. EBITDA also rose impressively from $952 million to $1.1 billion.

Same-store sales rose 4.4% and were up 11.9% for the full year. Also, margins increased year-on-year from 39.6% to 41.2%. In the prepared food and beverage segment, it also grew by double digits to 14%, with margins increasing from 56.5% to 58.1%. Same-store grocery and general merchandise also rose 11 percent, with margins up nearly 1.5 percent from 33 percent to 34.4 percent.

Continuous expansion

Their loyal customer base and purchases can probably be attributed to their performance. Year-over-year rewards members increased from 6.5 million to 8 million in Q4. In addition, the 22 stores acquired in Q4 and 154 stores in total for the fiscal year.

They have also moved into a new market in the state of Texas, which will likely be beneficial in the long run. Most may know that Texas is the largest state in area and second in population only to California. They also saw a positive growth rate, which is why CASY made the move in the first place. This brought their total to 22 states.

In addition, the company acquired an additional 198 stores in an all-cash deal worth $1.145 billion, which is expected to increase in-store sales by 8%. In addition, the acquisition is expected to expand its footprint to 2,900 stores, with an additional 148 stores in the state of Texas. This also pushed the company into other southern states like Alabama, Mississippi and Florida, a good move in my opinion.

Currently, Casey’s General Stores are well ahead of their plan for 350 stores by 2026. With that, I expect CASY’s to see solid growth with margin expansion and growth in the rewards membership program.

A growing dividend

During my previous thesis, Casey’s paid a quarterly dividend of $0.43. And as mentioned before, this was well covered with a free cash flow payout ratio of just 11%. The company also does frequent buybacks, returning plenty of cash to its shareholders.

And if that’s not enough to entice you, they also raised their dividend by double digits to $0.50 this past June. Moreover, they continued to buy back shares, repurchasing $15 million during the quarter and $105 million for the fiscal year. They also had $295M remaining, which I expect management to continue to buy through FY25.

Free cash flow growth was also strong at $92 million in Q4, up 31.4% year over year. And for the fiscal year, that was $371 million. And as part of management’s strategy, FCF is expected to be $1.25 billion over the next two years.

Although FCF was down from the prior year, cash from operations increased year-over-year from $881.9 million to $892.9 million. Using their shares outstanding, this gives CASY a free cash flow payout ratio of just 17.1%, giving them plenty of room for sizeable dividend increases going forward.

You can see from the chart below how the convenience store operator pays out only a small portion of its free cash flow as dividends. Moreover, as the company continues to buy back shares and expand, this is likely to decrease in the future.

Balance sheet

Casey’s balance sheet was also in pristine shape, with $1.6 billion in long-term debt and nearly enough cash to meet that by $1.1 billion. This gives the company financial flexibility to continue its expansion plans as they have no significant debt maturities until June 2025.

After that, they have no more debt until 2028, as most of their debt matures after the next 5 years. Their leverage ratio was 1.5x, down from 1.8x during my previous thesis. This was compared to Kroger (KR), which had a leverage ratio of 1.25x.

Risks and assessment

With strong performance that doubles the S&P in price performance, Casey’s General Stores’ stock price may have gotten ahead. At the time of writing, the stock has a P/E of nearly 27x, well above their 5-year average of nearly 23x, exposing investors to potential downside risks.

Additionally, if the economy goes into a recession and the market experiences a steep selloff, they could see a significant downside because of their roughly 46% appreciation in the past year. But as seen from their strong performance, the shares may have re-rated higher and could be worth a bigger premium.

In my opinion, I think the company deserves a premium between 25x – 30x earnings. What’s more, they continue to move into additional states, which should only help expand margins and boost shareholder confidence. Using the current P/E, the stock still offers about 24% upside from its current price of $359.

Conclusion

Although CASY’s stock price has significantly outperformed the S&P and is currently trading above its 5-year average, I believe that with its performance and strong fundamentals, along with continued expansion, the company could have re-rated higher, thus warranting a higher premium.

In addition, they rewarded shareholders with 16.3% growth and increased their member rewards at a time when many companies faced difficulties from a weaker consumer due to higher interest rates . As a result of continued expansion, low payout ratio, clean balance sheet and growth potential, I continue to rate Casey’s General Stores a buy.