For the next position in my dividend growth portfolio, I've decided to select a cyclical consumer goods stock. After research, Target (NYSE:TGT) seems to present a good buying opportunity from this sector. My research process based on my business plan calls for the analysis of financial strength, valuation, fundamentals and dividends. Financial strength and fundamentals examine the quality of the company while valuation ensures that it is being purchased for a fair value.
Dividends are also researched as they are the cornerstone for the dividend growth strategy. Outside of the numbers and data researched, I also investigate a company's market advantages and where they stand competitively within their sector before opening or expanding a position. For research, I use several sources such as the S&P Capital IQ STARS Report, Morningstar and the U.S. Dividend Champions spreadsheet maintained by David Fish.
Looking at financial strength, I examine S&P quality ratings which provide a key for analyzing growth and stability of both earnings/dividends. TGT currently scores an A (high for quality). Morningstar gives TGT a credit rating of A. Both of these indicate financial strength.
These research firms also indicate that TGT is fairly valued to undervalued. S&P gives TGT a fair value rating of 4 (slightly undervalued). Currently, it has a fair value of $68.20. Morningstar recommends a purchase price of $65.00 and rates the company at 3 stars (fairly valued). Both of these seem to indicate that TGT is at a good price point for making a purchase as it is not overvalued in the market.
The fundamentals look good too. I refer to the S&P STARS report for most fundamental research. TGT has an earnings per share of 2.96 which is relatively low and an estimated 5-year annual EPS growth of 3.78.
Beta shows how a company responds to swings in the market. TGT's beta is relatively low at 0.59. Within my portfolio, I strive to keep the overall beta at 7 or below. The S&P stars ratings are also helpful in determining how healthy a company is. They rate the company on total return and if the company is expected to outperform in the next 12 months. They give TGT four stars which is a BUY and indicates a bullish company.
Moving on to dividends, I mostly use David Fish's amazing U.S. Dividend Champions spreadsheet. For my entire portfolio, my plan sets an overall dividend return of 4.5%. I don't purchase anything yielding below 2%. TGT's current yield is 3.59% which exceeds this standard. The dividend growth rates also appear stable. Over 10 years, the dividend growth rate has been 19.7 and over 5 years it has been 23.4%. Since then it has stabilized back to 19.8% in the past 12 months. Although it has decreased in the past 5 years, the overall trend still appears stable.
TGT's EPS payout ratio based on dividends is 70.27%. This is good for a large company and indicates they enjoy paying their shareholders a large portion of their earnings. Since they are financially strong and have good fundamentals, this high ratio isn't a concern.
TGT currently has a chowder rule of 25 which is exceptionally high. The chowder rule, also known as the total dividend return rule is the sum of a company's yield and 5-year dividend growth rate. If these two pieces of data add up to 12%, the price (combined with quality) represents a good purchase point. TGT currently doubles this minimum.
Lastly, from observation and research, TGT is striving to stay competitive. They have taken several steps to make their credit/debit cards systems more secure this year after the data breach that slowed sales. I believe the company's heightened awareness of financial security will lead to further growth of their REDcard debit card program. The 5% discount the debit card provides makes TGT's prices more comparable to competing retailers.
In addition, they have opened several stores in Canada and acquired several Zellers retail locations. Even though these Target Canada stores aren't performing as planned, this move indicates their ability and willingness to expand and explore new markets in my opinion.
Based on fundamentals, valuation and a history of strong dividend growth, I believe TGT holds a place as the next purchase in my dividend growth portfolio. As I already have a position in TGT within my portfolio, I will be looking to expand that position soon.
Disclosure: The author is long TGT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Although all figures are thought to be correct, no guarantee is expressed or implied.