- Average annual growth in dividends of about 25%.
- The company has substantial buffer available in free cash flows to support future growth in dividends.
- The data breach has affected the customer confidence and it will take some time to revive that trust.
Target Corporation (NYSE:TGT) operates general merchandise stores in the U.S. and Canada with a consistent history of growing dividend payments to its shareholders since it went public. However, the company had a difficult last year in terms of financial performance due to the changing buying pattern of customers, adversely affected by the macroeconomic conditions and data breach issue in late 2013. In this article, we will discuss the dividends, dividend growth and performance, the current situation and how much future growth prospects there are for the company.
As mentioned earlier, Target has a consistent history of increasing its dividends to its shareholders. The company has grown its quarterly dividends at an average annual growth rate of 25% since 2009. Currently, Target pays an annual dividend of $1.72 per share, yielding 2.8%, which is higher compared to the industry average of 2.0%. Over the last year, the company paid cash dividends of $1.01 billion. Besides dividends, the company also bought back shares worth $1.5 billion, which takes the total cash returned to shareholders to approximately $2.5 billion. At the same time, the company generated over $3 billion in free cash flows - the payout ratio of the company based on free cash flows is close to 33%, easily manageable for Target. As a result, we believe the growth in dividends will continue for the company.
Target's ability to generate strong cash flows has allowed the company to distribute hefty cash dividends to its shareholders. Over the last year, the company reported an increase of 22% in its operating cash flows. Furthermore, the company expanded its operations in 2011 by buying several discount stores in Canada. The company is also working on strategies to generate growth in changing business environments. Target received hefty cash flows from the Canadian segmented sales in the last year, which generated $1.32 billion sales revenue. Moreover, Target also reduced its long term debt by 22% over the last year.
Over the last couple of months, the company has been suffering from repeated criticism over its famous data breach event of millions of its customers. Target suffered from a data breach, in which an intruder stole certain payment card and other customer information from the company's network. Further, the attackers gained access to customer names, credit card numbers and critical information. Consequently, the company also suffered from huge penalties imposed by the concerned credit card holding banks. Target is still suffering from low customer traffic and the data breach event has a negative impact on its cash flows.
However, the sales began to recover in January 2014, and Target is taking strict measures by spending approximately $100 million to equip its proprietary REDcards, chip-enabled smart-card technology, in order to prevent its customers from any such event in the future. However, these measures will take time, and the customers will be able to take advantage of this development in early 2015.
Due to continuously changing macroeconomic conditions, the customer buying behavior is shifting towards low-priced products complemented by technological innovations. Consequently, discount stores, which have been facing revenue shortfall challenges over the last few years, are also adapting new ways to counter this change in the pattern. Target Corporation also increased its exposure to online services as well as mobile apps over the last few years. The company acquired CHEFS Catalogue Cooking.com in the last year, which aimed to expand its presence in the growing cooking and kitchenware market. Recently, the company has launched Cartwheel which allows the members to choose their own combination of discounts from a wide range of limited-time offers.
Over the last couple of decades, Target has mostly relied on America's suburban areas to derive its revenue growth. While about 10% of Target's total stores are in the urban areas, the chain has traditionally shied away from the central business and shopping districts. After the recent economic turmoil, the company started to move deeper into cities and also expanded into Canada. Two years back, Target introduced a new format of small-sized stores called CityTarget, which aims to lure the lucrative suburban market. Target also planned to launch a much smaller format store called TargetExpress, by which the company is seeking to enhance the customer experience by providing innovative and dedicated services to them. These measures will enable the company to test different markets for its future growth as well as recover from losses caused by data breach over the last year.
The stock of the company is down about 7% year-to-date and about 15% during the last twelve months. The data breach has severely dented customer confidence, and it will take some time to revive the trust. However, the dividend performance of the company remains strong, and we believe the growth in the dividends will continue. Furthermore, innovative techniques and expansion efforts should allow the company to grow well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.