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As the economy continues to struggle with low growth in consumer spending, many strong retail companies have received an undeserved market thrashing. The current negative market sentiment towards retailers has resulted in low P/E value offerings combined with respectable yields. Beyond the respectable yield, all four of these picks are growing their dividend at a 5-yr annualized rate of greater than 9%. In addition, all four offerings have strong balance sheets to weather the storm of the current economic slowdown. Finally, from an EPS growth perspective, all four companies trade at a small P/S ratio, which holds a potential for increasing profits once margins can improve.

Target (NYSE:TGT):
  • Yield of 2.43% (quarterly @ 30 cents); 5-yr annual growth of 20.11%
  • P/E Ratio: 12
  • P/S Ratio: 0.5
  • Debt/Assets: 36%
  • Current Ratio: 1.7
Target has expanded strongly throughout the past 10 years, with sales growing at an annual pace of 6.7%. While growing sales, Target has also provided strong return to shareholders via a dividend with a 10-yr annualized growth rate of 18.5%. Target has also repurchased over 200M net shares representing a 22% reduction in total. Target’s apparel line has proven productive and, while Walmart (NYSE:WMT) recently posted a 0.9% comparative US sales drop, Target just posted a 3.9% comp increase (Q2-11).
Home Depot (NYSE:HD):
  • Yield of 3.02% (quarterly @ 25 cents); 5-yr annual growth of 10.76%
  • P/E Ratio: 16
  • P/S Ratio: 0.7
  • Debt/Assets: 24.3%
  • Current Ratio: 1.3
Home Depot is still performing strong amidst a stubborn housing downturn. HD has repurchased over 700M net shares over the past decade representing a 30% decrease in outstanding shares. Although sales have struggled recently, HD has proven that they can still make a solid profit while increasing the dividend at a respectable rate.
Best Buy (NYSE:BBY):
  • Yield of 2.55% (quarterly @ 16 cents); 5-yr annual growth of 9.85%
  • P/E Ratio: 8
  • P/S Ratio: 0.2
  • Debt/Assets: 9.6%
  • Current Ratio: 1.2
Best Buy is simply not a “fashionable” stock to own. After Blockbuster and Borders declared bankruptcy, Wall Street pundits turned their eyes to electronic B&M stores such as Best Buy and Game Stop (NYSE:GME). However, Best Buy has a proven record for growing profits, and is pursuing a strong retail development in China. A little known fact is that Best Buy also has repurchase authorization for over 50% of their outstanding share count ($5B authorized, $9.3B mcap). I wrote a more in-depth analysis of BBY last week that contains further details on these initiatives.
Gap (NYSE:GPS):
  • Yield of 2.74% (quarterly @ 11 cents); 10-yr annual growth of 6.58%
  • P/E Ratio: 9
  • P/S Ratio: 0.6
  • Debt/Assets: 0%
  • Current Ratio: 1.87
Gap has suffered along with several other clothing retailers such as American Eagle (NYSE:AEO) and Aeropostale (NYSE:ARO). Over the past 10 years, Gap has grown their dividend at an annualized rate of 17.6% while repurchasing almost 300M net shares. These repurchases represent over 30% in 10-yr reduction. Although Gap is not immune to the recession/slump, their ZERO-debt, strong current ratio, and overall scale make them a strong long-term recovery bet.

Disclosure: I am long BBY.
Source: 4 Retail Stocks With Strong Dividend Growth