Target Corporation - Dividend Fact Sheet

| About: Target Corporation (TGT)
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Target Corporation (NYSE:TGT) is a U.S.-based retailer with an extensive network of stores throughout the United States and now in most major Canadian cities.

Target trades on the New York Stock Exchange under the ticker “TGT”.

TGT is part of the S&P500 index.

TGT currently trades around $57.00 and currently yields about 3.65% (taking into account the most recent dividend increase).

TGT is an American corporation and therefore pays its quarterly dividends in U.S. dollars. All the following figures are thus in U.S. dollars.

Notably, foreign investors will likely be subjected to withholding tax.

Dividend Calendar

TGT pays a quarterly dividend.

The dividends are generally declared in January, March, June and September, and are generally paid in March, June, September, and December.

TGT typically increases its quarterly dividend once a year, in June. In that sense, the last dividend increase, in June 2014, was 20.9% (from $0.43 per quarter to $0.52 per quarter).

Dividend History

With the most recent increase, TGT has increased its quarterly dividend for 47 consecutive years, making TGT a dividend champion (over 24 years of consecutive dividend increases).

The evolution of the annualized dividend and of its growth over the last ten years is presented in the graph below.

Over the last decade, TGT has maintained an average compound dividend growth rate of 20.27% and an average year-over-year dividend growth rate of 20.41%.

So, despite some ups and downs, TGT’s dividend growth rate has been pretty stable over the last 10 years. In that sense, the most recent increase (having occurred this June), which was 20.9%, clearly continues that trend.

Overall, a stable dividend growth rate is great for us dividend investors. It makes future forecasts easier to make.

Still, I’m not sure TGT will be able to maintain such a high dividend growth rate over the long term. After all, a dividend that grows by 20% per year doubles about every 3.5 years. That would mean that in 10 years, the dividend would be around $12. In my view, this is unlikely.

Dividend Analysis

In this section, I verify two important aspects of the dividend:

  1. Is the current dividend safe?
  2. Is the current dividend likely to grow?

Understandably, answering no to either one of these questions should mark the stock under consideration as being unsuitable for dividend investment purpose.

Is the current dividend safe?

To determine the safety of the dividend, I check the historical levels, the current level and the evolution of the payout ratio with respect to the earnings and, when relevant, with respect to the free cash flow.

First, the evolution of the earnings, dividends, and payout ratios.

There are several points to note from the graph.

First, despite having multiplied its dividend by 5 over the last decade, TGT has maintained, until 2012, a payout ratio under 30%, which is very low (and thus very safe).

Second, despite a tough 2013, mostly due to the less successful than expected Canadian expansion, TGT still has a reasonable payout ratio of about 50% (still safe).

Third, even if the payout ratio has generally remained low (under 30%), it has been on the rise since 2005. So the dividend is growing faster than the earnings.

So, is the dividend safe? I think so.

To begin with, the drop in earnings in 2013 was mostly due to the costly Canadian expansion. Though the initial results of this expansion have not been as good as expected, I believe TGT will tweak its approach to better fit the slightly different Canadian market. Over time, I think the Canadian expansion will be positive.

In addition, even with a tough year, TGT still has a very reasonable payout ratio. Unless the earnings continue to drop, I expect TGT's payout ratio to return to its lower historical average.

In the end, the dividend appears to be safe. The payout ratio is reasonable at 50% and should start to decrease when the earnings start to grow again. Overall, I think the current dividend is safe.

Is the current dividend likely to grow?

To begin with, TGT has been growing its dividend each year for more than 40 years. Not only that, TGT is also proud of this achievement and does not hesitate to mention it.

Clearly, TGT has demonstrated its willingness to pay growing dividends to its shareholders. In that sense, TGT has reiterated its commitment with yet another large dividend increase this month. So, it seems clear enough that as long as TGT remains a profitable business, it will grow its dividend.

Still, I doubt that TGT will maintain its recent high dividend growth rate for many years to come. As we have seen, despite a historically low payout ratio, the payout ratio has been on the rise. At some point, TGT will have to slow down the dividend growth to allow the earnings to catch up. Otherwise, the payout ratio will reach an unsustainable level.

For now though, the dividend will likely continue to grow. Overall, I think the current dividend is likely to grow in the foreseeable future.

Stock Valuation

Estimated Fair Values

To calculate a range of fair values, I calculate how much one share will return in cumulative dividends over the next 20 years, according to different scenarios, and adjust for inflation.

The calculations are performed using the affiliated website Dividend Stock Valuation.

For TGT, I’ve used the following inputs:

  • Share price: $57.00
  • Dividend rate: $2.08
  • Dividend growth rate:
    • Optimistic scenario: 20.0%
    • Realistic scenario: 16.0%
    • Pessimistic scenario: 12.0%
  • Discount rate: 3.5%

The optimistic DGR generally corresponds to the 10-year average, while the realistic and pessimistic DGRs respectively correspond to 80% and 60% of the optimistic DGR.

According to the above values, the range of estimated fair values for TGT varies from $97.46 (pessimistic) to $238.34 (optimistic) with a realistic value of $151.22.

With a current share price around $57.00, TGT appears significantly undervalued.

I’ve also calculated that the DGR would need to be only 6.80% over the next 20 years to justify the current price of $57.00. Compared to its recent historical average, this DGR is pretty low.

Though I don’t think TGT can maintain a DGR of 20% over the next 20 years, TGT can certainly maintain a DGR of at least 6.80% over the next 20 years. Even more so since the payout ratio is still very reasonable and the company has yet to benefit from its Canadian expansion. At $57.00, I think TGT is undervalued as a dividend investment.

Estimated Cash Return

With the estimated cash return, I calculate how much cumulative dividends a fixed investment in the stock under consideration will return over a period of years.

Estimated cash return values allow to compare dividend stocks with different yields and different growth rates.

For TGT, I’ve used the following inputs:

  • Initial investment: $1000
  • Current yield: 3.65%
  • Dividend growth rate:
    • Optimistic scenario: 20.0%
    • Realistic scenario: 16.0%
    • Pessimistic scenario: 12.0%

Notably, the DGRs are the same as the DGRs used for valuation.

I also compare the various estimated cash return values with the estimated cash return of a benchmark dividend stock having a yield of 3% and a dividend growth rate of 8% (e.g., Procter & Gamble (NYSE:PG) or Johnson & Johnson (NYSE:JNJ)).

Clearly, if TGT can maintain at least the pessimistic DGR of 12%, an investment in TGT would return significantly more than a comparable investment in a benchmark stock.

Even if TGT was to grow its dividend at the DGR calculated above to justify the current price (i.e., 6.80%), an investment in TGT would return almost exactly as much money as a comparable investment in a benchmark stock.

As we have seen, maintaining a DGR of 6.80% should be relatively easy for TGT. Overall, I don’t see much risk in TGT, at least with respect to the cash return. At the current price and yield, I think TGT would make a safe dividend investment.


Before taking a closer look at TGT, most of what I heard in the news was bad. First, the Canadian expansion did not go as planned. Second, TGT has been the victim of a massive data breach.

So, I had some doubts about TGT. Well, these doubts have been laid to rest. From what I can see, TGT is a great company and also a great dividend stock.

The company has increased its dividend for more than 40 years. The current payout ratio is very reasonable. And at the current price and yield (taking into account the most recent increase), TGT appears to be significantly undervalued. What's not to like?

I think TGT is a buy. At the very least, it should be on your watchlist.

Final recommendation: I think TGT is a buy at the current price.

Full Disclosure

I don’t currently own shares of TGT. I don’t intend to initiate a position in TGT within the next 72 hours.