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Family Dollar Stores Inc. (FDO - Analyst Report), the operator of self-service retail discount store chains, recently announced a dividend hike and an additional share buyback program. Thus, revealing its plan to utilize its free cash to boost stakeholders’ return.

The Matthews, N.C. - based company, raised its quarterly dividend by 23.8% to 26 cents (or $1.04 annually) from 21 cents a share (or 84 cents annually). The company announced that the increased dividend will be effective from the next quarterly payout.

Since the inception of the dividend program in 1976, the company has raised its dividend every year, this being the 37th successive hike. Family Dollar’s commitment towards increasing shareholders’ return reflects its free cash flow generating capability, sound liquidity position and defined future prospects.

However, the news did not provide impetus to the stock, as the share price of Family Dollar dropped 0.5% or 31 cents to close at $58.04 on Thursday. The dividend yield based on the new payout and the last closing market price is 1.8%.

In January 2012, Family Dollar last hiked its dividend to 21 cents from 18 cents a share, reflecting an increase of 16.7%.

Dividend hikes not only enhance shareholder’s return but raise the market value of the stock. Through this strategy, the companies bolster investor confidence on the stock, thereby persuading them to either buy or hold the scrip instead of selling them. Looking ahead, the company remains confident of its growth potential, suggesting enhanced value for shareholders via dividend payout as well as share buybacks.

Apart from the dividend increase, Family Dollar enhanced its existing share repurchase authorization of $94 million by $300 million, and stated that the repurchases would be made through cash generated from operating activities.

Earlier this month, Family Dollar posted lower-than-expected first-quarter fiscal 2013 results. The quarterly earnings of 69 cents a share missed the Zacks Consensus Estimate of 74 cents but inched up 1.5% from 68 cents earned in the prior-year quarter. Management also trimmed its fiscal 2013 earnings outlook to a range of $3.95 to $4.20 per share, down from a band of $4.10 to $4.40, forecasted earlier.

Family Dollar, which competes with Wal-Mart Stores Inc. (WMT - Analyst Report) and Dollar General Corporation (DG - Analyst Report), holds a Zacks Rank #5 (Strong Sell).

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