Target, Time To Buy For A Dividend Growth Investor

Jun. 9.14 | About: Target Corporation (TGT)

Summary

Target has shown strong compound annual dividend growth over the last decade, exceeding 19%.

Fallout from the data breach last year presents a buying opportunity.

Target maintains a position in the mid to upper scale discount store space.

Introduction

It is fitting that Target's (NYSE:TGT) (pronounced "tar-zhay" by some) logo is a giant red bulls-eye, given that's what the company has had painted on its back since being the victim of a significant data breach toward the end of last year. While this may embolden some to steer clear of the company as shares were already under pressure from earnings weakness, others may benefit from the potential buying opportunity caused by the lingering effect of the news.

Sure, it's never a good thing to have sensitive customer data fall into the hands of hackers, but Target is not alone in experiencing a breach like this and others will be sure to follow. TJ Maxx (NYSE:TJX) and Marshalls maintain the distinction of having one of the worst breaches back in 2006. Even the United States government with its vast resources has not been able to prevent leaks and other unauthorized dissemination of sensitive data.

Challenges

A big headwind that Target will have to fight through is the fact that its primary sales growth driver is directly related to the negative effects of the data breach. It's a lot more difficult promoting a REDcard to a consumer after you just had millions of credit card numbers stolen. Year over year total company sales on REDcard were up to 19.3% from 13.6%, highlighting the growth in sales.

The company also states that a typical REDcard holder spends 50% more than before they held the card. This increases the importance of regaining customer confidence as quickly as possible. Target started this process quickly offering a weekend 10% discount to shoppers after the breach was revealed.

I'm not sure this headwind will last long; many consumers have a short memory, need for instant gratification, and an insatiable appetite for credit. Some shoppers may have been deterred to shop at other stores, but they will slowly return. There is a noticeable difference in shopping experiences between Target and Wal-Mart (NYSE:WMT) for example. While they obviously cater to different demographics, they are also direct competitors.

There are not very many brick and mortar choices for those wishing to buy a frozen pizza, designer jeans, patio furniture, and Blu-Ray copy of The Avengers all under the same roof in a clean, upscale discount store. A possibility might be Costco (NASDAQ:COST), which in another world, would be Target's competitor to Wal-Mart's Sam's Club.

Target does a great job at being a discount retailer while still maintaining a mystique that appeals to higher income individuals. This may be highlighted by the fact that while Wal-Mart and Sears (NASDAQ:SHLD) still maintain a layaway program, Target has not bothered with the idea. Their customers don't need it.

Dividend Growth

It's my opinion that Target will make a full recovery and that it's an attractive buy for those looking for dividend growth. Shares are currently yielding 2.98% and dividend growth has been consistently high for years. The latest increase along with the 3, 5, and 10-year compound annual growth rates exceed 19% as shown in the following table.

TGT

Current Yield

2.98%

3-Year Dividend CAGR

19.81%

5-Year Dividend CAGR

20.39%

10-Year Dividend CAGR

19.90%

Latest Increase

19.44%

MRQ/3/5/10 Year Average

20.03%

Click to enlarge

Whether or not the company can maintain this kind of dividend growth remains to be seen but it does show a commitment to growing dividends by management. Hypothetically, if the company were able to continue increasing dividends at a compound annual growth rate of 19%, an investor's yield on cost would be over 12% after 10 years. That's a nice figure to consider.

Conclusion

"Expect More. Pay Less." That is Target's slogan and it is applicable to its shares right now just as much as the products found in its stores. It's a good time to pay less for shares and expect more from the company financially moving forward. From a dividend growth perspective, Target has exhibited very good growth numbers for the last decade. The fallout from the data breach is temporary, not permanent. There's little to suggest Target's board will dampen dividend increases moving forward.

Disclosure: I am long TGT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.