1 Dividend Growth Stock Down 61% to Buy Right Now

With shares down more than half from an all-time high of $248 reached in 2022, Dollar General (NYSE: DG) is a fallen star that has caught the attention of value-hungry investors. Challenges like pandemic-era inflation wreaked havoc on its low-cost business model, ceding ground to larger retailers like Walmart. However, now the tables could be turning.

Management's recovery efforts are starting to show results, and macroeconomic challenges like tariffs and potential recession could impact the company less than its rivals. Let's dig deeper into the reasons why this dividend growth stock could be a strong buy right now.

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Why did Dollar General's stock decline?

Dollar General's business model is a natural winner. The company fills the gaps left by big box retailers by serving America's lowest-income consumers, often in rural areas and neglected urban food deserts. It keeps prices low through a streamlined, no-frills shopping experience, usually offering off-brand items in smaller-than-standard sizes.

Business boomed during the pandemic era as Dollar General expanded its lineup and benefited from government stimulus efforts, which boosted consumer spending -- especially in lower-income demographics. Cracks began to show in 2022 and 2023 as demand began to fade and challenges, like inflation, ate away at consumers' purchasing power.

However, under the leadership of CEO Todd Vasos (who returned from retirement in 2023), Dollar General has begun an ambitious turnaround strategy that involves reworking its supply chains and merchandise selection. So far, the results look promising.

Dollar General's operations are improving

Dollar General's fourth-quarter sales jumped 4.5% year over year to $10.3 billion. And while operating income fell 49% to $294.2 million, this was influenced by noncash charges related to store closures and asset impairments that may not repeat in subsequent quarters. While Dollar General isn't totally out of the woods, there is light at the end of the tunnel. Trump's trade war may also have unexpected benefits.

According to analysts at Citigroup, Dollar General may be better positioned to weather the new import levies compared to rivals.

The research suggests only 10% of its sales are likely to be affected by tariffs, which is far below the 50% to 100% exposure across the retail sector. This advantage likely has a lot to do with the company's focus on food and other consumable items that tend to be produced in the United States.

Dollar General may also be better suited to withstand macroeconomic risks like recession by attracting wealthier consumers who would normally shop at slightly more upscale stores like Kroger or Target. However, this is not guaranteed. Dollar General will have to work hard to differentiate itself from other low-cost retailers like Walmart, and lower tariff exposure could give it a long-term edge.

Is Dollar General stock a buy?

Dollar General's improving fundamentals have not gone unnoticed by the market, with shares up by an impressive 28% year to date. That said, the stock remains relatively cheap, with a forward price-to-earnings (P/E) multiple of just 17. For context, the S&P 500 index has an average of 28, while industry leader Walmart boasts an eyewatering forward P/E of 38.

Dollar General gives investors an affordable way to bet on the U.S. retail industry, and the company's insulation from tariff-related headwinds could make its business safer than rivals. The stock's dividend yield of 2.4% is icing on the cake. And with a payout ratio that hovers around 46%, the company has room to maintain or grow its dividend, especially as its turnaround strategy begins to reach the bottom line.

Should you invest $1,000 in Dollar General right now?

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Citigroup is an advertising partner of Motley Fool Money. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.