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Long/short equity, dividend investing, growth at reasonable price, research analyst
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I get a lot of ideas for investing in a lot of different ways and at a lot of different times. Most of my ideas come from time spent researching financial data on websites, but occasionally a great idea enters my consciousness during simple conversations with friends. I don't mean those instances when a close friend gives you his latest "hot stock tip" or his latest great idea. I dismiss those suggestions immediately upon hearing them. Those are usually nothing more than someone looking for confirmation of their own bad idea. I listened to those "hot tips" when I was younger and I lost more money acting on those "hot tips" than I care to remember. It's those kinds of losses that have taught me over the years to do my own research. And everyone should understand that lesson without having to experience those losses.

Recently, I was having one of those innocent conversations that all of us have every day of our lives when I mentioned I needed to stop by Wal-Mart (NYSE:WMT) to pick up a few things. The person I was speaking to immediately said "I like shopping at Wal-Mart but they're too expensive." That comment struck me as odd because I've been conditioned by all the commercials to understand that Wal-Mart is "Always the Lowest." So I thought to myself, "Does Wal-Mart have a lock on their customer base or are other companies starting to cut into their market share?" I decided to look into the fundamentals of three companies and see what's going on internally. I decided to look at Wal-Mart and see how it compares to the fundamentals of Target (NYSE:TGT) and Family Dollar (NYSE:FDO).

Wal-Mart operates retail stores in various formats worldwide. The company operates in three segments: Wal-Mart U.S., Wal-Mart International, and Sam's Club. It operates retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam's Clubs, neighborhood markets, and other small formats, as well as walmart.com; and samsclub.com. Further, it operates banks that provide consumer financing programs; and offers financial services and related products. As of October 15, 2013, the company operated approximately 11,000 stores under 69 banners in 27 countries and e-commerce Websites in 10 countries.

Target Corporation operates general merchandise stores in the United States. The company distributes its merchandise through a network of distribution centers, as well as third parties and direct shipping from vendors. Further, it provides general merchandise through its website, Target.com; and branded proprietary Target Debit Card. As of Nov. 21, 2013, it had 1,919 stores, including 1,797 stores in the United States and 122 stores in Canada.

Family Dollar Stores Inc. operates a chain of self-service retail discount stores primarily for low- and middle-income consumers in the United States. Its merchandise assortment includes consumables, hardware and automotive supplies, and home products. The company also provides apparel and accessories and seasonal and electronic products. As of Oct. 16, 2013, it operated approximately 8,000 stores in 46 states.

Comparing fundamentals of several companies is always a little tricky because different assumptions are used when calculating sales, earnings, and dividends. I took information from several different sources but I took similar data from similar sources in order to make the data comparisons comparable. I gathered data used in this analysis from Yahoo Finance, Finviz, and the Nasdaq websites for use in analyzing these companies, therefore the credibility of this analysis is dependent upon the credibility of those sources.

My Initial Comparison

With a price of $77.43 and earnings of $5.20, WMT has a P/E ratio of 14.89 and a PEG of 1.73. By comparison TGT has a price of $62.49, earnings of $3.74, a P/E ratio of 16.70 and a PEG of 1.55, and FDO has a price of $64.49, earnings of $3.83, a P/E ratio of 16.83 and a PEG of 1.48. Based on this initial comparison all three have a P/E ratio less than 20 and a PEG greater than one. So far I consider all three of these companies as comparable from an investment point of view.

PriceEarningsP/EPEG
Wal-Mart$77.43$5.2014.891.73
Target$62.49$3.7416.701.55
Family Dollar$64.49$3.8316.831.48

Comparison of Sales

In terms of the current quarter over quarter (Q/Q) comparison, WMT sales have increased by 1.70%, TGT sales have increased by 1.90% and FDO sales have increased by 5.80%. Annual sales growth over the past 5 years for WMT has been 4.50%, for TGT it has been 3.00%, and for FDO it has been 8.30%. Based on this information FDO far exceeds WMT and TGT for both the Q/Q and the previous 5 year sales.

Q/Q Sales GrowthAnnual Sales Growth
Wal-Mart1.70%4.50%
Target

1.90%

3.00%
Family Dollar5.80%8.30%

Comparison of Earnings

For the previous five years annual earnings increases at WMT have been 9.70%, at TGT they have been 6.20%, and at FDO they have been 18.20%. For the next 5 years earnings are expected to increase annually at WMT at 8.64%, at TGT 11.20%, and at FDO 10.89%. To put this in perspective, earnings at WMT seem to be pretty steady, at TGT they seem to be increasing, and at FDO they seem to be decreasing. Here the best selection going forward is probably TGT but FDO is a pretty strong second. Historical earnings tell me a lot about the inertia of the company but I'm investing in forward earnings so I consider these more important.

Previous 5 YearsNext 5 Years
Wal-Mart9.70%8.64%
Target6.20%11.20%
Family Dollar18.20%10.89%

Comparison of Dividends and the Payout Ratio

All three companies can be found on the list of Dividend Aristocrats so dividends have been distributed continuously for at least 25 years and dividends have increased at least once each year during this same time period. So that's good. In fact that's terrific. With a dividend of $1.88, WMT has a current yield of 2.42% and a payout ratio of 36.15%. TGT has a dividend of $1.58, a current yield of 2.52% and a payout ratio of 42.24%. FDO has a dividend of $1.04, a current yield of 1.61% and a payout ratio of 27.15%. Based on this information TGT is currently the most desirable since I like companies that pay at least a 2.50% current dividend yield. But I'd also be concerned that their payout ratio is relatively high. The lower payout of FDO leads me to believe that dividend increases may be more generous with an investment in FDO.

DividendCurrent YieldPayout Ratio
Wal-Mart$1.882.42%36.15%
Target$1.582.52%42.24%
Family Dollar$1.041.61%27.15%

Comparison of Dividend Growth Rate

Dividends are important but if they don't grow over time then their buying power will decay with the rate of inflation. Therefore I look for a dividend growth rate greater than inflation and these days I look fondly at growth rates greater than 3.00%. WMT has a three-year dividend growth rate of 15.65%, a five-year growth rate of 14.62%, and a 10-year growth rate of 11.73%. TGT has a three-year growth rate of 23.18%, a five-year growth rate of 21.36%, and a 10-year growth rate of 18.07%. FDO has a three-year growth rate of 18.61%, a five-year growth rate of 15.77%, and a 10-year growth rate of 11.82%. All three of these companies in all three time periods have excellent dividend growth rates way in excess of inflation projections with TGT having the greatest dividend growth rate. Looking forward into the future the greater growth rate combined with the greatest initial current yield for these three companies bodes well for TGT.

3 Years5 Years10 Years
Wal-Mart15.65%

14.62%

11.73%
Target23.18%21.36%18.07%
Family Dollar18.61%15.77%11.82%

Conclusion

Based on sales, earnings and dividends, it appears that Target would be the better investment going forward. The one downside to Target is the higher payout ratio which could impact its ability to increase its dividend if profits falter in the future. The other downside is the effect the recent credit/debit card security breach may have had or will have on current and future sales and earnings. If there are any lasting effects to Target's customers they may shy away from the stores for some time. In addition, Target will have to offer additional discounts to get customers back into their stores and those discounts may affect current and future profits. At this point I would take a wait and see with Target and instead I will seriously consider investing in Family Dollar as funds become available. If the picture clears with Target, then that company may be the better investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Target Comes Out Ahead Vs. Wal-Mart And Family Dollar