3 Reasons Why an S&P 500 Correction Won't Stop Me From Buying More Dollar General Stock

For over a decade, retail store Dollar General (NYSE: DG) has been a constituent of the S&P 500, an index of 500 of the largest, most profitable companies in the U.S. As of March 18, the S&P 500 was down 9% from its all-time high and had even briefly been down 10%, which is what's commonly called "correction territory." But for Dollar General, the situation is much worse.

Whereas the S&P 500 last hit an all-time high mere weeks ago, Dollar General stock hasn't sniffed an all-time high since late 2022. For its part, the stock is down roughly 70% over the last 2.5 years.

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A good percentage of this drop for Dollar General stock is entirely legitimate, in my view. Consider that profits tend to drive stock price over the long term. Usually this implies business growth -- it's easier to grow profits when the business is growing. For Dollar General, this hasn't been a problem. The top line just hit an all-time high and is up nearly 40% in the last five years.

However, as the chart below shows, Dollar General's profits -- its earnings per share (EPS) specifically -- have been cut in half in recent years.

DG EPS Diluted (TTM) data by YCharts.

Therefore, Dollar General stock should be down because the company has a profit problem. That's bad enough. But now the S&P 500 itself is struggling, giving some investors further reason to avoid Dollar General stock. Here are three reasons why turbulent market conditions won't prevent me from buying more of this stock.

1. It's getting a handle on the problems

Dollar General's profit problems start with its gross margin. It's dropped in recent years due to inventory problems. In short, it had too much stuff, leading to increased damage, theft, and markdowns. The chart shows that the company's current gross margin is well below its long-term average.

DG Gross Profit Margin data by YCharts.

Dollar General had net sales of more than $40 billion in its fiscal 2024. Once a retail business reaches a scale such as this, even small fluctuations in gross margin can have an outsized effect on the overall bottom line.

The good news for shareholders is that Dollar General is finally seeing progress. Here's just one example of the progress: In the third quarter of 2024, the company had a small improvement when it comes to theft. In the fourth quarter, the improvement was bigger. Management expects this trend to continue throughout 2025.

It's unreasonable to expect businesses to never have problems. They often do. Businesses that overcome problems are worth looking at. For Dollar General, things were difficult. But now, after more than a year of working on problems, it's seeing progress. That's good news.

2. It's returning to profit growth

In 2024, Dollar General had EPS of $5.11. For 2025, management thinks it will have EPS of at least $5.10. But that's on the low end. On the high end, management thinks it can earn up to $5.80. If it hits the high end of guidance, that would represent nearly 14% year-over-year growth.

Turning to longer-term guidance, Dollar General's management is calling for annual EPS growth of at least 10% starting in 2026. Granted, some of its EPS growth will likely come from buying back stock. But it certainly has room to improve profit margins, growing EPS that way as well.

Under this long-term guidance, it's possible for Dollar General's EPS to double over the next five to seven years. This is an entirely reasonable assumption. Even if it doubles from 2024 levels, it still wouldn't surpass its previous all-time high.

In other words, profit growth is really important, and Dollar General is forecasting good growth. Even though the forecast is strong from this starting point, it's still an easy-to-believe forecast, because the business has achieved comparable profits before.

3. It's really cheap today

Assuming that Dollar General grows its EPS by 10% annually in 2025, 2026, and 2027 -- within guidance -- it would have EPS of $6.80 in 2027. At its current price, investors are only paying 12 times those future earnings.

That's on the low end. If Dollar General has better than 10% annual EPS growth, then shares are even cheaper today. Not only that, the stock has a dividend yield of nearly 3%, which is nice and has never been higher. In other words, investors are getting paid relatively well as they wait for profit improvements to take hold.

There are questions about the economy today, which is why the S&P 500 has dropped. But Dollar General has performed well during previous periods of economic headwinds. I expect the same now, which is another reason to take advantage of its cheap stock price today.

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Jon Quast has positions in Dollar General. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.