Target Corp.: Dividend Darling Or Deadbeat Dud?

 |  About: Target Corporation (TGT)
by: Charles Lewis Sizemore, CFA

Target Corp. (NYSE:TGT) can't seem to do much right these days. Its CEO resigned in disgrace as the fallout from the credit card security breach last year continues to build. Sales are down, as customers have been timid about swiping their cards at Target, fearing their data could be compromised again. And Target's expansion into Canada 14 months ago has proven to be an unmitigated disaster, generating roughly a billion dollars in losses so far.

At a time when brick-and-mortar rival Wal-Mart (NYSE:WMT) is gaining ground on (NASDAQ:AMZN) in online sales, Target's online presence hasn't amounted to much. Up until as recently as 2011, Target depended on Amazon for site hosting and fulfillment.

Yet while Target has had its share of operational setbacks of late, Target stock has been shining light of shareholder friendliness. Target has raised its dividend every year since 1967-a run of 47 years, and counting- and it has also been a serial share repurchaser. Since 2002, Target has reduced its shares outstanding from 1.3 billion to just 638 million as of its last reporting. That's a reduction of 44%.

Target Shares Outstanding

Let's return to Target's dividend growth. Target's dividend has grown by 19% over the past year, which would be good news by itself. But what is truly impressive is the consistency. Target has grown its dividend by a compound annual rate of 20% for the past 10 years. And going back 20 years, it's a not-too-shabby 13%.

1-Year % Increase 19%
3-Year % Increase, Compounded 20%
5-Year % Increase, Compounded 22%
10-Year % Increase, Compounded 20%
20-Year % Increase, Compounded 13%
Click to enlarge

Think about the past ten-year period. It's been a never-ending string of crisis with one of the worst recessions in U.S. history in the middle. Yet Target still managed to raise its dividend at a 20% annual clip. To put that in perspective, at a 20% growth rate, the dividend doubles every three and a half years.

Today, Target stock has a quarterly dividend of $0.43, or $1.72 per year. That works out to a dividend yield of 2.9% at current prices. That may not be an eye-popping yield, but it's significantly higher than what one can expect from the 10-year Treasury, which yields 2.6%.

Let's have a little fun with the numbers. Let's say that Target continues to raise its dividend by 20% a year. That $1.72 annual payout would grow to $10.65 over 10 years. Your effective dividend yield on your cost basis would be 18%. And this, of course, says nothing about capital appreciation or dividend reinvestment.

Ok, Target is in something of a rough patch right now; I get that. So maybe 20% annualized dividend growth isn't realistic. Let's say something more along the lines of Target's 20-year average of 13% is more likely. That $1.72 annual dividend still grows to $5.83 over 10 years, giving you a 10.0% dividend yield on your original cost basis.

Should you run out and buy Target today? Based on valuation, I would say that you certainly could. Target stock is priced at just 12 times forward earnings and 0.5 times sales. Though a better approach might be to average in over the course of a few months. It's too early to know whether the bloodletting in Target stock is over; should Mr. Market not like the new CEO when announced, we could easily see another round of selling. But if you're looking to buy a dividend-raising superstar to fund your retirement, put some Target stock in your shopping cart.

Disclaimer: This site is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results.