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Target (TGT), a general merchandiser, has a goal to upsurge its earnings from $4.06 per share currently to $8 per share by the end of 2017. To accomplish this goal, the company is adopting an expansion strategy, buying back its shares, and paying dividends.

Canada expansion - earnings upsurge

Target entered the Canadian market for the first time in March this year with a plan to open 124 stores by the end of this year. Currently, the company is on track; it opened 68 stores by the end of its second quarter, which generated $275 million in revenue. Consistent with its plan, it will add 23 new stores in Canada by the end of this month.

However, the company's bottom line is facing problems due to the capital expenditures it's incurring in Canadian expansion. Its August profits declined by around 13% to $611 million, on a year over year basis. However, these stores will contribute towards the company's earnings in the long run, and Target has projected its earnings per share to double from Canadian operations, which will reach $0.82 by this year end.

We believe that the company's plan to open 124 stores by the end of this year is a well thought out initiative. Although it's currently putting pressure on the company's bottom line, we expect it will act as a tailwind to its earnings going forward since its earnings are expected double, contributing towards its earnings goal of $8 per share by the end 2017.

Share buyback

In the past 10 years, Target repurchased approximately 30% of its market cap, depicting strong cash flows. Further, in 2012, Target's management authorized a $5 billion share repurchase of its stock. Since the commencement of this plan, the company repurchased approximately $3 billion worth of shares. It has repurchased 49.1 millions of its common shares at an average price of $62.99 per share. Currently, $2 billion worth of shares are left in this plan, which is expected to be completed by the end of January 2015. On average, the company repurchased approximately 29.46 million shares annually, and we expect Target to continue at the same pace. Impact of this share repurchase plan on the earnings for the next 12 months is shown below.

Year

Net Income

Outstanding shares(million)

EPS

2013

$2.99

630.92

$4.74

2014

$2.99

601.46

$4.98

Subsequently, the number of shares is expected to decrease to 601.46 million by the end of 2014. Assuming the company's net income to remain constant, its earnings will grow by 5.06% to $4.98 per share. Henceforth, the share repurchase activity will contribute towards Target's goal for EPS of $8 by the end of 2017.

Dividend analysis

With its strong fundamentals, Target has distributed incremental dividends for 46 years in a row. Recently, the company declared that it will pay a quarterly dividend of $0.43 per share. The company has a trailing dividend yield of 2.40% and has a forward annual dividend yield of 2.70%, depicting incremental dividends over the coming 12 months.

Additionally, over the last 10 years, Target's EPS is growing by 9.40%, and its dividend payments are growing by 18.60% per year. Dividend payments are growing ahead of its earnings, implying that the company is increasing its dividend payout ratio at a much faster rate rather than investing its earnings in capital expenditures. Its high dividend yield and dividend payment growth rate makes us believe that income investors should include this stock in their portfolio.

For comparative analysis, we have analyzed the dividend distribution of Target's major competitors, Wal-Mart Stores (WMT) and Costco Wholesale (COST).

Wal-Mart Stores also has a history of paying incremental dividends to its shareholders for 40 years in a row. The company generated strong free cash flows of $5.2 billion in the first half of 2013, and it increased the dividend during the same period by 18.20% to $0.47 per share. Its earnings are growing at 10.60%, as compared to its annual dividend distribution growth of 18.10% per year.

Along with its distributing incremental dividends, Wal-Mart has a trailing dividend yield of 2.50% and forward dividend yield of 2.60%. This increase implies that the company will continue to distribute incremental dividends over the coming 12 months. These facts make us believe that Wal-Mart is also a desirable stock for income investors.

On the other hand, Costco Wholesale's earnings are growing at 8.6% on an annual basis, and its dividends are growing at 13.3% per year, which is also ahead of its earnings growth. As far as its dividend yield is concerned, it has a low current dividend yield of merely 1.08%. Its dividend payout ratio is around 25%, implying that the management retains much of its earnings for capital expenditures.

Comparative Analysis: Depicting earnings growth of the company

Company

PEG

Target

0.77

Wal-mart

1.38

Costco wholesale

1.81

This PEG ratio includes the 12 months forward earnings growth rate. A lower PEG ratio is always a plus for investors, as it depicts the company's higher earnings growth and an undervalued stock. With the lower PEG ratio of Target Corporation, we believe that the company will be able to accomplish its earnings goal of $8 by the end of 2017. Along with this, as we have discussed above, Target has a history of distributing higher dividends than its earnings, so earnings growth is expected to eventually convert into higher dividend payments to its shareholders.

With its strong fundamentals and attractive valuation, we recommend investors to buy TGT.

Source: Target: Is $8 EPS Possible?

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.