Target (NYSE:TGT) is an icon in the retail world, but things haven't been going well for the company for a little bit. Which helps explain why recent buyback and dividend news wasn't as great as you might have been hoping for. But there's a bigger picture to what's been going on, too.
Target's sales have basically been in neutral for the last few years, posting roughly 0.2% annual growth over the last three years. Retail is a notoriously slow growth business, at least when you are talking about industry giants like Target, but that's pretty abysmal. And well below its growth over the past decade of around 3.3% growth annually (including the current weakness).
Earnings have been a lot more volatile because of the company's disastrous foray into Canada. A move that left it running for the border, and with a stiff asset write down, having done just about everything wrong in its attempt to expand into a new market. A leadership change at the very top and subsequent makeover of most of the rest of the top management has been going on for a while now.
Some of the key focuses today are fixing the grocery business, centering on its most profitable retail lines, and figuring out online sales. Mixed results is probably the best thing that can be said of these efforts. Target clearly has problems today.
To be fair, the retailer is hardly alone, since Wal-Mart (NYSE:WMT) has also been dealing with some difficulties of its own. Wal-Mart, for reference, has seen sales growth at around a 1% clip over the past three years. But this speaks to the bigger problem that investors need to think about when they read about Target's dividend and stock buyback.
When Microsoft (NASDAQ:MSFT) announced its most recent dividend hike, I noted that it was well below the growth rate of recent history. The same is true of Target. For example, over the past decade, Target's dividend has grown at a nearly 20% annual clip. The most recent hike was less than half that, at roughly 7%. It's hard to complain about a dividend increase that handily outdistances the 3% historical rate of inflation, but you also can't ignore the changes taking place.
The same goes for the stock buyback just announced. The last buyback program was for $10 billion and should be completed this year. The company has repurchased over 18% of its outstanding shares since the buyback was put in place in 2012. The new plan is for $5 billion, half the size of the last one. At least Microsoft kept its buyback funding at the same level, though it really doesn't matter since buybacks are optional-a company can announce whatever it wants, but it doesn't have to do anything at all.
The truth is, Target is facing challenges and protecting its cash flow is the right move. So slower dividend growth and a smaller buyback are, in turn, the right moves. The company is still rewarding shareholders for sticking around, but it is also being prudent with its finances. And Target remains a large and profitable company, despite its issues. It's highly likely it will figure a way to right the ship.
The bigger picture here, though, is that Target is yet another company where dividend growth has been slowing down. Wal-Mart, for reference, is another, along with Microsoft. Some of the largest, most respected companies that dividend investors follow are clearly pulling back. That's not a good thing.
Worse, it comes at a time when a large group of investors are looking to such dividend payers to prop up their income streams. That, in turn, has pushed many large dividend payers near all time highs-despite weakening results and slowing dividends. Frankly, the troubles appear to be well articulated, investors just aren't willing to listen.
Target, to be fair, is around 20% off its recent highs, so investors are clearly concerned about something here. And the news of a smaller buyback and slower dividend growth back up that concern in my eyes. These trends aren't unique to Target, though, and eventually more investors will question what's going on at the companies they own. Target is just one more concerning data point in a bigger picture that suggests dividend investors should be worried about the future.
Disclosure: I am/we are 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.