Target Dividend Stock Analysis
First of all, I like to have exposure to the retail sector in my dividend stock portfolio. But with Amazon out to conquer the world, is that still a good idea? Let’s find out by taking a peak at a well known US retail company.
So please join me for a dividend deep dive of Target. Certainly I will have some thoughts on the Target dividend.
COMPANY BACKGROUND
Target’s goal is to offer their customers high-quality, on-trend merchandise at discounted prices. Also they do this through clean, spacious, guest-friendly stores and through digital channels. Furthermore, their customer profile looks like this:
- Median age of 40
- Median household income of approximately $64,000
- Approximately 43% have children at home
- About 57% have completed college
TARGET DIVIDEND YIELD
Target pays an annual forward dividend of $2.56 cents per share. This is a 3.1% Target dividend yield at the recent price of $87 per share.
COMPOUND ANNUAL DIVIDEND GROWTH RATE
| 1 Year | 3 Years | 5 Years | 7 Years |
| 5.2% | 8.7% | 13.1% | 16.5% |
Earlier this year, the Target dividend was increased a modest 3.2%. Furthermore, the company touted that 2018 is the 47th consecutive year in which the Target dividend has been increased. Certainly that is a nice long history of dividend growth!
Finally, dividend growth has slowed the last few years as the company has struggled with a number of business and operating issues.
REVENUE
Virtually all of the company’s revenues are generated in the United States. Most noteworthy, Target’s recent revenue history has been rather inconsistent. Even more, threats have come internally and externally including:
- A significant breach of customer data in 2013
- Botched international expansion into Canada that was discontinued in 2014
- Competition from on-line retailers like Amazon
- Loss of strategic and operational focus resulting in a CEO change in 2014
In contrast, the revenue story for 2018 looks much brighter. Specifically,
- Unemployment is low and the US consumer is strong
- Target’s traffic growth of 6.4% is by far the best since the Company began reporting traffic in 2008
- Comparable store and channel sales are trending up 6.5 percent, the best performance in 13 years
TARGET DIVIDEND, EARNINGS AND PAYOUT RATIO
Since incurring a large loss to write off the Canadian operation in 2014, earnings have been range bound at about $5.00 per share. Consequently, stagnant earnings have limited dividend growth. Finally, lower dividend growth has kept the dividend payout ratio at about 50%. This is a fairly safe level for most stable companies.
A lower dividend payout ratio is generally better. It shows the company has ample room to raise the dividend in coming years. Or, withstand an earnings drop with out having to reduce the dividend.
CREDIT RATING
Knowing a company’s credit rating is important. Furthermore, it can make a big difference between companies that struggle and those who prosper during a recession.
Finally, a corporation’s credit rating is similar to how your personal credit score works. Most noteworthy, higher ratings mean lower risk to those who lend the company money. Also higher ratings mean lenders will likely get their loans paid back.
Certainly we are not lenders here at Dividends Diversify, we are dividend stock investors. Rather, it never hurts to check out a company’s credit worthiness.
Above all, Target has an investment grade, low credit risk rating. The ratings are provided by two of the big rating agencies:
- Moody’s – A2 rating
- S&P – A rating
Most noteworthy, these ratings are solid and a good sign for Target and their ongoing financial stability.
VALUATION
Investors have taken notice of the company’s improved revenue performance. Consequently the stock is trading near it’s 52 week high.
The combination of a higher stock price combined with limited earnings growth for 2018 has the price to earnings ratio on the rise. As a result, it is a little more than 15 times 2018 projected earnings. This is a fairly reasonable valuation. Finally, a lower price to earnings ratio typically represents a better value for the investor.
SUMMARY & WRAP UP
Target is tough to call from a dividend investment standpoint for me. Have they rediscovered their niche consumer in the US? Can they compete with the likes of Amazon and Wal-Mart. Will rising revenues persist in the event of an economic downturn? If the answer is yes to these questions, then Target is a great investment at these prices.
Unfortunately, I do not have a crystal ball. So for me, Target can play a smaller supporting role in a diversified dividend stock portfolio as it does in mine. It represents a solid diversification option from other more typical dividend stocks in the utility, energy and consumer staples sectors. Certainly Target has demonstrated a strong long term dividend growth track record that I expect to continue.
OTHER RELATED ARTICLES
I hope you enjoyed this article. If so, here are a couple others that you may find interesting:
- The model portfolio where Target resides: The Dividend Deluxe
- The process I use for dividend stock analysis: Dividend Deep Dive
WHAT ARE YOUR COMMENTS?
Do you own Target? Do you shop at Target? What do you think of the company’s prospects? Leave a comment and let us all know!
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I do shop at Target, sometimes that is. I favor the prices of Walmart more and have stock there instead.
Walmart’s certainly been a good investment over the long term SMM. Hopefully it has done well for you. Tom
I don’t own target at the moment, but I shop there quite frequently. It seems to have a reputation of being “a bit nicer” than Walmart – at least in Chicago.
Hi Mike, I have had the same impression regarding the shopping experience at Walmart versus Target. I will say that I think Walmart over the past several years has made strides at improving its stores and the customer experience. All while investing heavily in the e-commerce side of the business. Tom
I’ve never been a big fan of Target for some reason although people do love it where I live. I do most shopping for consumer goods at Walmart. I don’t own either stock at the moment.
Thanks for your thoughts Mr. DS. I frequent both Wal Mart and Target depending on what I’m looking for. It’s hard to beat WalMart’s prices for everyday stuff. Tom
Hi Tom,
Target is one of the few individual stocks we own. My wife Lily says it’s a good investment, and she tends to have a good eye for retail trends. On account of that, we hold a small position in it.
Cheers,
Miguel
Hello Miguel. I do remember from one of your recent blog posts that Target is one of your investment holdings. I can also tell from Lily’s articles that she has a great eye for style and trends. So I’m glad Target gets her vote of approval! Tom
I own few shares of TGT. Bought it at quite good price. As you said its a tough call but I like it much more then WMT with its small dividend yield of 2% and P/E over 20. or eve 30 something (hard to tell normalized EPS). Sure WMT looks more optimistic in L/T as a business but it looms overvalued, while TGT look better valued, but as you said has some issues.
Thanks for the assessment of the pro and cons from your perspective p2035. Hopefully we will make a few bucks holding on to Target for the foreseeable future. Tom
Hi Tom, I don’t shop much at Target. In the last 20 years I only bought probably one item. The retail business is tough, due to the competition with those online giants. Personally I still prefer the brick and mortar stores. Hopefully the coming holiday season could boost Target’s business.
That’s quite a statement Helen since there are so many Targets in the US and they have relatively broad appeal. I can only conclude you do not live near a Target, you do not like the stores or clearly have better shopping alternatives near your home. Agree on the retail business, it is tough. Traditional shopping malls have been hit very hard from my understanding. Tom
I am holding a handful of shares in TGT and would really like to add more, but I’ve been waiting to see if the price comes down a shade below $80/share. It came close with the volatility in October but didn’t quite make it.
My wife, sister, and niece are all huge fans of Target–as are a lot of their friends–and commonly mention how they go in for one thing and leave with quite a bit more. In our area, the Target stores are much cleaner than Walmart. They are also starting the grocery pickup service like Walmart has, and with the Toys ‘R Us closures they are planning to boost up their toy department for the holiday season.
Overall, I really like TGT and am looking to add more at the right price. I don’t think the current price is too bad, but I’d like a better margin of safety.
Thanks for your thoughts, especially from a consumer perspective DD. Always good to get that kind of feedback. Prior to moving 2 years ago, we lived close to a Target that we frequented a lot for all the reasons your family/friends mention. Now we live closer to a pretty nicely maintained WalMart, so that is where we go for household items and some packaged food. It just shows how low consumer loyalty can be. Add the disruption of Amazon and it’s a tough business for sure. I still like to have my toe in the retail sector however. Thanks for commenting. Tom
I don’t own Target and I do not shop there either. I do shop at Walmart but I find the selection hasn’t been has good in the last few months. Definitely no loyalty with any of them on my part, just based on selection and price. Cheers
Probably not very many Target’s left in Canada from my understanding so not surprised you do not shop there. Interesting comment on the selection at WalMart changing/being limited. Thanks Caroline. Tom
Hi Tom,
First off, great analysis. I m a big shareholder of Target and love the company. We used to do a lot of our grocery shopping there. However, you can’t beat the Aldi/local grocery store combo. With that being said, my wife has a Red Card and she still uses their discount apps/programs for a lot of different things. From what I have been reading, the company has battled back and has improved their online experience and using their footprint to punch back at Amazon. I’ll be very excited to see the results this holiday season and I think it will tell you all you need to know about whether or not the company is “back”
Bert
Hi and thanks for your thoughts Bert. Glad we are fellow owners. Always have my red card handy too, although I don’t live as close to a Target as I did a couple years ago. I think both Target and Walmart are going to keep up the good fight even with all the disruption going on in the sector. Will look forward to the holiday financial results along with you. Tom
I walked through Target in Hawaii but didn’t buy anything 🙂 I find their grocery food prices higher. But I do love their towels and home decor brand.
It didn’t do well up here in Canada, I don’t know why! I remember the store closing sale, everyone was in a mad dash to buy everything for cheap.
“Botched international expansion into Canada that was discontinued in 2014”
Now that you mention it, we like some of their home decor stuff too GYM. The quilt on our bed right now is from Target. The Canada expansion is perplexing. Seems like a natural extension of what they do in the US. Tom
Hi Tom,
First of all, thanks for a simple and great analysis – it was a pleasure to read it.
Since I am not from the US and haven’t been there yet, I haven’t shopped in Target 🙂 I also don’t own their stock. There may come a day when I decide to purchase some shares of a big retail player and I was close to purchasing some Kroger shares but decided to go with another sector then 🙂
BI
Hello BI. Thank you for the kind words on the analysis. I try to make them a straight forward and easy read. And most importantly, the metrics I present are the ones I look at as I consider buy, hold, sell decisions. Going through the numbers and the business issues really helps me and I hope it helps readers like you. Thanks for the feedback. Tom
Hi Tom. I own Target stock, and my family frequents their stores as well. We have a Walmart in town too, but prefer Target for their
selection of merchandise and cleaner stores.
Target seems to be working hard to remodel most stores and keep their finger on the pulse of shopper’s preferences. I like that they are willing to change with the times.
As for the stock, I only got in last year, so it’s been good for me. At the time, there was major concern over their online sales and keeping pace with the likes of Amazon and Walmart. The strides Target has made in that arena over the past year seems to have calmed those fears.
Target’s dividend streak is amazing and I agree it should continue for years to come. However, I’d like to see the dividend growth pick up to something north of 5-6%. Of course, I’d like to see revenue growth improve as well. The company is still working through many significant changes, so I’m willing to hold tight and see if the improvement comes.
Good assessment ED. Glad you got in at a good time. My local Target just got a major remodel as you mention. This is one to keep a close eye on with all the change going on in retail. Thanks for your thoughts. Tom
I am loving Target stock. Have owned it for a few years no and has done pretty well. It dipped a lot toward the end of last year. Everyone had their doubts that retail is dying and TGT couldn’t come back to its former levels. Took advantage of that dip and bought more. Since its low in January, it is up like 33% and right near their 52 week high. I forgot, if it didn’t already achieve dividend king status this year, it will next year. That being said, who knows what will happen in the future, but they give me no reason to sell any time soon. Their online sales have been increasing every year which has been helping them. Nice to see them trying to adapt to a change in the market.
Thanks for your assessment Daze. I am glad that is has worked out well for you. Sounds like you got in at right time/price which is so important. Tom