Target Corp. (NYSE:TGT) is a Dividend Champion that has increased their dividend every year for 44 consecutive years. Perhaps even better, Target offers prospective shareholders a dividend yield that is greater than what they can earn from a 10 year Treasury bond. But best of all, Target is trading at one of its lowest valuations in decades. You would have to look at its lows during the depths of the great recession of 2008 to have found it any cheaper than it is today. Moreover, the last time it was this inexpensive, shareholders were able to see their investment double off of its lows in just a little over a year's time (February 27, 2009 price $28.31-April 30, 2010 price $56.87). Consequently, we believe that Target Corp. currently offers the trifecta of value, growth and yield.
With interest rates hovering near all-time lows, investors needing income are faced with very limited choices. The traditional high yield available from bonds and other fixed income vehicles are no longer available to meet the goals of retirees needing income to live off. Moreover, it is almost a certainty that today's low yields are not adequate enough to fight inflation. Consequently, there is a growing investor interest in dividend paying common stocks, especially those that have a long record of increasing their dividend every year.
Growth and dividend income stocks are defined as companies that provide the opportunity for long-term capital appreciation and a growing dividend income stream over time. Both capital appreciation and dividend growth will generally be consistent with the company's average earnings growth, assuming there is a strict adherence to sound valuation.
Target Corp. : Large-cap Growth at an Attractive Price
About Target Corp.: from their website
"Minneapolis-based Target Corporation serves guests at 1,763 stores across the United States and at Target.com. The company will open its first stores in Canada in 2013. In addition, the company operates a credit card segment that offers branded proprietary credit card products. Since 1946, Target has given 5 percent of its income through community grants and programs; today, that giving equals more than $3 million a week."
Earnings Determine Market Price: The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.
Target Corp.: Historical Earnings, Price, Dividends and Normal PE Since 1993
Performance Table Target Corp.
The associated performance results with the earnings and price correlated graph, validates the above discussion regarding the two components of total return, capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.
When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 11.7% capital appreciation, long-term shareholders of Target Corp. would have received an additional $108,780.68 in dividends that increased their total return from 11.7% to 12.4% per annum.
The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as normal as it has been since 1993.
A further indication of valuation can be seen by examining a company's current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for Target Corp. is .51 which is historically normal.
Looking to the Future
Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:
1. The rate of change (growth rate) of the company's earnings
2. The price or valuation you pay to buy those earnings
Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.
Therefore, it logically follows that measuring performance without simultaneously measuring valuation is a job half done. Target Corp. is clearly an industry leading superior business, which based on the consensus estimates from leading analysts, appears to be capable of growing earnings at an above-average rate for the foreseeable future. At its current price, which is attractively aligned with its True Worth valuation, Target Corp. represents an opportunity for growth at a reasonable price. The important factor is that Target Corp., with its strong balance sheet and potential for future earnings growth, has real assets and cash flow underpinning its stock price. This solid economic foundation offers shareholders the potential for both a strong margin of safety and an opportunity for outsized future returns.
The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.
The consensus of 21 leading analysts reporting to Capital IQ forecast Target Corp.'s long-term earnings growth at 12%. Target Corp. has medium long-term debt at 50% of capital. Target Corp. is currently trading at a P/E of 12.4, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Target Corp.'s True Worth valuation would be $114.46 at the end of 2017, which would be a 15.7% annual rate of return from the current price.
Earnings Yield Estimates
Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Target Corp. to an equal investment in 10 year Treasury bonds illustrates that Target Corp.'s expected earnings would be 6.3 times that of the 10 Year T-Bond Interest. (See EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.
Summary & Conclusions
This report presents essential "fundamentals at a glance" illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it's imperative that the reader conduct his or her own due diligence in order to validate whether the consensus estimates seem reasonable or not.
Target Corp. can clearly be purchased today at a significant discount to how the market has historically valued this business. The opportunity to invest in a high quality Dividend Champion blue-chip such as Target at such a low valuation is a rare opportunity. Share earnings growth is expected to re-emerge in fiscal 2013, and as such should supply a stimulus for possible PE expansion. Consequently, today's low valuation appears to represent a potentially short window of opportunity to acquire this strong business on sale. With future growth projected to be above average out to mid-decade and beyond, this stalwart with its above-average and growing dividend yield suggests a solid long-term buy and hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.