Taking Aim On The Target Dividend Stock Analysis

Let’s jump right into a Target dividend stock analysis.

I like to have exposure to the retail sector in my dividend stock portfolio. And Target’s dividend profile has been attractive in the past.

But with Amazon to compete with, is investing in retailers still a good idea?  I like to think so. But unfortunately, Amazon doesn’t pay a dividend.

So, let’s check in on the Target dividend, dividend growth, and dividend safety.

And see what the dividend metrics look like. Are they supported by solid business fundamentals? We will be sure to find out.

Related: How to pick dividend stocks

Target Company Background

Target’s goal is to offer its customers high-quality, on-trend merchandise at discounted prices.  Also, they do this through clean, spacious, guest-friendly stores and through digital channels.

Target’s customer profile looks like this:

• The median age of customers is 40 years
• Median household income of approximately $64,000
• Approximately 43% have children at home
• About 57% have completed college

Source: Target Corporate Overview

Geographically, Target:

• Is headquartered in Minneapolis, Minnesota
• Has stores in all 50 United States and District of Columbia
• Those stores are located within 10 miles of 75% of the US population

Not just another big box store, Target also owns:

• Shipt delivery service
• Grand Junction, a delivery logistics technology company
• Dermstore skincare and beauty e-commerce site

Source: Target – About

Target Growth Strategy

Walmart and Amazon have a distinct scale and cost advantage in the retail segment. So, an effective business strategy is a must for Target to compete.

Target is striving to be “America’s Easiest Place To Shop”.

Management’s goal is to use Target brick and mortar stores as a competitive advantage. Specifically, using them as hubs to support an omnichannel retail strategy.

Those channels being:

• Grocery delivery
• Drive-up order pick
• In-store order pick
• In-store shopping
• Ship from store

To implement the strategy, significant investment is being made on store renovations to improve the customer in-store experience. And also, supply chain logistics technology to maximize efficiency and reduce costs.

Target’s strategy and investments are expected to deliver:

• Low single-digit annual percentage revenue growth
• High single-digit annual earnings growth

Target Dividend Yield

Target pays an annual forward dividend of $2.64 cents per share.  This is a 2.4% Target dividend yield at the recent Target stock price.

Historical Target Dividend Growth

1 Year	3 Years	5 Years	7 Years
3.2%	3.9%	6.5%	10.2%

Earlier this year, the Target dividend was increased a modest 3.1%. It appears the cash required to invest in stores and technology has had a negative impact on dividend growth.

Target Consecutive Annual Dividend Increases

On a more positive note, the 2019 dividend increase is the 48^th consecutive year in which the Target dividend has been raised.  Certainly, that is a nice long history of dividend growth!

Target is closing in on becoming a Dividend King. Dividend Kings are those rare and special companies that have increased their dividends for at least 50 consecutive years.

Target Revenue Trend

Virtually all of the company’s revenues are generated in the United States.  But you may have noted from the chart above that Target’s recent revenue history has been rather inconsistent.

In addition to dealing with a highly competitive retail environment, threats have also come from internal issues including:

• Bad press from a significant breach of customer data in 2013
• Botched international expansion into Canada that was discontinued in 2014
• Loss of strategic and operational focus resulting in a CEO change in 2014

In contrast, the more recent revenue story looks a little brighter.  At a minimum, it aligns with management’s low single-digit percentage growth rate expectations.

Target Dividend, Earnings & Payout Ratio

Since incurring a large loss to write off the Canadian operation in 2015, earnings were range-bound at about $5.00 per share from 2016 through 2019.

But finally, Target’s strategy appears to be paying off. Management’s earnings guidance for the fiscal year ending in January 2020 looks like a nice break to the upside.

We are seeing in the earnings trend what management has been telling investors:

• 2017 – Investment year
• 2018 – Transition year
• 2019 – Positioned for profitable growth

And their positioning for-profits appears to be sustained in 2020.

Most importantly, higher profits combined with modest dividend growth has reduced the dividend payout ratio to 45%

A lower dividend payout ratio is generally better.  It shows the company has ample room to raise the dividend in the coming years.  Or, withstand an earnings drop without having to reduce the dividend.

Target Free Cash Flow

Dividends are paid from cash. So, I like to cross-check a company’s dividend payments against its free cash flow.

I see no red flags here. Dividends payments have consumed less than 40% of free cash flow over the past 3 years.

The remaining cash has been allocated to retiring debt and repurchasing shares.

Debt reduction and share buybacks are both good practices. But, this is a slow-growth company. I would prefer that management prioritize faster dividend growth over share repurchases.

Target Dividend Policy

Target does not have a specific and stated dividend policy. The closest they come is communicating general priorities for cash. According to their CFO, during the 2019 financial community meeting, priorities for cash are:

• Invest in the business
• Support the dividend
• Return excess cash

Source: Target 2019 financial community meeting

Target Credit Rating

Knowing a company’s credit rating is important.  A corporation’s credit rating is similar to how your personal credit score works.

Higher credit ratings mean lower risk to those who lend the company money.  Put another way, higher ratings mean lenders are more likely to get their loans paid back.

So, it never hurts to check out a company’s creditworthiness.

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

These ratings are solid. And, a good sign for Target and its ongoing financial stability.

Target Financial Position

Target’s debt to equity ratio sits at 1.15 to 1. This is a moderate level of debt and shows a balanced capital structure.

Target Dividend Safety

I make a subjective judgment on dividend safety taking into account a number of the factors we have reviewed thus far:

• Dividend payout ratio
• Historical dividend track record
• Free cash flow generation
• Financial position
• Business health
• Growth strategy

In my estimation, I consider Target’s dividend to be very safe from a reduction in the foreseeable future.

Target Dividend Growth Projection

I mentioned earlier that it appeared Target’s significant level of business investments were negatively impacting dividend growth. However, according to recent comments from their CFO, she expects the pace of store renovations to be reduced after next year.

Reduced capital expenditures for stores, in theory, will free up cash for other purposes. Maybe faster dividend growth? I don’t know for sure. But this is what I see happening:

• High single-digit earnings growth
• Maintenance of a dividend payout ratio at less than 50% of earnings

This brings me to a 4-5% projected annual dividend growth rate for Target. That is what I will use for my income planning purposes.

Target Stock Valuation

I will judge the Target stock valuation using several different methods:

• Dividend discount model
• Price to earnings ratio
• Morningstar fair value estimate

Target Dividend Discount Model

The single-stage dividend discount model considers several factors I have discussed thus far:

• Current annual dividend payments – $2.64 per share
• Projected dividend growth – 5%
• My desired annual return on investment – 9%

Under these assumptions, the dividend discount model calculates the fair value of Target stock at $69 per share.

Target Stock Price To Earnings Ratio

The Target stock price to earnings ratio sits at about 18 times their fiscal 2020 earnings.

For comparison, the S&P 500 also trades at 18 times forward earnings.

Morningstar Fair Value Estimate

Finally, the investment analysis firm Morningstar believes Target stock is fairly valued at $82 per share.

Source: Morningstar

Target Stock Valuation Conclusions

The valuation metrics show Target stock to be fully valued at a minimum. And worst case, significantly overvalued.

I tend to side with the dividend discount model and Morningstar. I believe Target stock is significantly overvalued at recent price levels.

Target Dividend Stock Analysis Conclusions

From a business standpoint, Target must continue to meet the challenges of stiff competition for consumer dollars.

Have they rediscovered their niche consumers in the US?  Can they compete with the likes of Amazon and Walmart?  Will revenues and profits continue to rise in the event of an economic downturn? Only time will answer these questions.

From my dividend investors’ perspective, the stock doesn’t have much current appeal to me. Why?

• Low dividend yield (less than 2.5%)
• Subpar dividend growth prospects (4-5%)
• Overvalued stock price

Target stock holds a mid-size position in my dividend growth stock portfolio. I intend to hold my shares but have no interest in adding to my position at this time.

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• Walgreens dividend stock analysis
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I own Target stock and collect the Target dividend.