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After The McGraw-Hill Companies Inc. , which recently raised its quarterly dividend by 6.4% to 25 cents from 23.5 cents, and Tiffany & Company (TIF - Analyst Report), which recently announced a share repurchase program of $400 million, it is now the turn of Family Dollar Stores Inc. (FDO - Analyst Report) to utilize its free cash to enhance shareholders’ return, thereby boosting investor confidence in the stock.

The North Carolina-based Family Dollar raised its quarterly dividend for the 35th successive year by 16.1% to 18 cents from 15.5 cents. The increased dividend will be paid on April 15, 2011, to stockholders of record as on March 15, 2011. Increase in dividend, reflects the company’s sound financial position and well-defined future prospects.

With signs of recovery in the economy, share repurchases and dividend increases have now become common among companies sitting on surplus cash. These strategies not only enhance shareholders’ return but also boost earnings per share and raise the market value of the stock.

Family Dollar has been actively managing its cash flows, returning much of its free cash to shareholders through share repurchases and dividends. The company has also been making prudent investments relating to store infrastructure; store openings, expansions and relocations; and improvement of distribution centers to drive revenue growth.

Despite a challenging macro environment, Family Dollar’s strategic initiatives to improve the merchandising, marketing, and store operations have resulted in sustained growth in the top and bottom lines. Management now expects a growth of 8% to 10% in net sales and an increase of 17.6% to 23.3% in earnings per share in fiscal 2011.

The effective price management, cost containment, tighter inventory control, private label offering, expanded operating hours and recent merchandise initiatives should drive sales and margin trends. Moreover, in order to enhance the market share Family Dollar intends to focus on both consumable and discretionary categories.

However, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn the company’s growth and profitability.

Currently, we have a Neutral rating on the stock. Family Dollar, which operates more than 6,800 stores, also holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating, which correlates with our long-term recommendation.

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