Minimum Wage Hike Talk Helps Dollar Stores

Before reading this "economic-political" piece, understand that this is not trying to take a side on a policy here.  I don’t have to take a side in this, I just have to get it right.

In a speech this morning it was a little surprising to hear President Bush say in a public speech that he supports a $2.10 hike to the minimum wage over 2 years.  There was of course a hedge to the statement in that it was with a caveat "in a way it won’t hurt businesses."  So that means you have to determine if this statement is going to come to light or not.  Personally, I predict this just locked in a minimum wage hike BEFORE the 2008 elections in some staggered manor. 

It probably won’t really be a $2.10 hike, but this just locked in something significant.  Maybe I am being naive in believing politicians on either side of the aisle, but the prediction stands.  The republicans need to appeal to a broader base and the way to reach right down to the little guy is by offering them a pay raise, and the democrats have been gunning for this for a while.  I won’t go into the macroeconomic implications of a $2.10 hike to the minimum wage (even though it will likely be a lower amount).  The hike probably won’t be implied to the sub-20 hours per week and teenage part-time workers, but the line in the sand just became visible.

OK, enough on the political front because our readers come here for stocks.  I already noted in the past right after the election that the minimum wage was going to rise.  The writing is on the wall.  Who is the single largest beneficiary of a hike in the minimum wage?  The absolute purest beneficiary for stock traders from a hike in the minimum wage is the DOLLAR STORES.  This will actually give a more prolonged dividend (if that analogy is fair) to lower income earners than a $300 tax refund ever thought about.  Think about it, even if it ends up being a $1.00 hike:  $1, 30 hours, $30/week, $120/month, $1,440/year, 15% tax plus another 5% miscellaneous that somehow works out to 20% tax: $1,152.00 per year.  Yes this helps other businesses and yes this is inflationary, but the dollar stores are the winners.  Wal-Mart will of course too as will others, but the pure-play would be the Dollar Stores.

These have run with the market and run with the implied private equity interest in the cash flow story, but this just locked in the future of their business.  At a minimum this will act as a stabilization factor to a slowing lower-income consumer.  Dollar Store stocks are up more than the market in general today:

Dollar General (DG) $15.94 (+$0.33, +2.1%)
$4.97B market cap

Family Dollar (FDO) $29.59 (+$0.70, +2.4%)
$4.5B market cap

Dollar Tree (DLTR) $30.05 (+$0.20, +0.7%)
$3.1B market cap

99C Only Stores (NDN) $12.21 (+$0.23, +1.92%)
$849M market cap

This can’t be taken to presume that all of these will win, because many have had "issues" in the operational side of their businesses.  Dollar General (DG) and Dollar Tree (DLTR) are the two that come up the most frequently as buyout targets.  Buyout fever has really gotten out of hand, but many of these companies offer fairly predictable cash flows and they could all be improved a bit.

That’s my read on the group, and they offer a more pure play on the minimum wage than some of the other underperforming discount and lower-end retailers.

Jon C. Ogg
December 20, 2006