Target Corp: Bullseye

| About: Target Corporation (TGT)
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Summary

TGT stock is at a five-year low.

TGT is a dividend grower, currently paying nearly 4.5%, and due for a dividend increase.

TGT has a 20+-year history of solid earnings, and 12-year history of steady dividend growth.

With its stock price at a five-year low, Target Corporation (NYSE:TGT), Walmart's (NYSE:WMT) main competitor, looks attractive as an income generator and/or a candidate for writing covered calls or selling naked puts.

Stocks of retailers have seen some substantial selling over the past few of sessions, during which TGT has hit new 52-week lows three times, firming somewhat on March 22, 2017.

At its recent lows, down more than 36% from its 52-week high of $84.14, TGT has become a "high yield" stock. Even with the Federal Reserve's actual and projected interest rate increases in 2017, you won't be earning TGT's 4.5% yield on banked money any time soon.

Important points about TGT:

- TGT has a long, long history of solid earnings. Check the stock price chart on Morningstar.com's TGT page, add in the "earnings" indicator, and you'll find only one quarter of negative earnings over the past 20 years.

- TGT's projected earnings over the next few years, plus their cash on hand, are more than ample enough to easily support the current dividend and projected dividend boosts. TGT's current payout ratio stands around 50 percent.

- Dividend Channel's TGT page shows the company has not gone more than four quarters without a dividend increase since mid-2003. TGT has already declared its fourth consecutive 60-cent quarterly dividend for May 2017, so it's reasonable to expect TGT to increase its dividend in August 2017. The May 2017 dividend is TGT's 199th consecutive quarterly payout since it went public in 1967.

- TGT has a super-active weekly options market, which gives you an array of choices on how to plot out an initial position using short puts, or pad your returns on your TGT holdings using covered calls.

- Key metrics (from Morningstar.com's TGT page) show TGT compares favorably with the rest of the retail industry:

Metric TGT Industry Avg.
P/E TTM 11.7 16.8
Price/Book 2.7 3.2
Price/Sales TTM 0.4 0.5
Net Income Growth 3-yr Avg. 11.6 -1.1
Net Margin TTM 3.9 3.1
Debt/Equity 1.0 0.6

- TGT's debt is higher than the industry average, but TGT's long term debt has been reduced nearly 25% since 2013, from $14.6 billion to $11 billion currently, so the company is making progress on that front.

Possibilities of profiting with TGT include:

- Selling naked puts at strike prices lower than the current price ahead of TGT's projected dividend ex-dates. (Remember: TGT stock is currently at a 5-year low. TGT is a very profitable company projected to earn plenty in the near future. How much lower do you think TGT's stock will go from here?) If the stock is put to you, you get in at a lower price (giving you a higher yield), you collect the dividend, and then you can sell covered calls on your holdings. If the stock is not put to you, you keep what you got from selling the puts. EXAMPLE: Sell July $50 puts now for around $150 per contract. The dividend ex-date will be around August 17th. If the stock is put to you, you can sell covered calls at a slightly higher strike price for beyond the dividend record date, collect the dividend AND the credit for selling the calls. (NOTE: If the stock price advances well beyond the call strike price, don't be surprised if the call is assigned prior to the dividend ex-date. It happens occasionally. You still make money, but you miss out on the dividend.) If the stock is not put to you, you keep the $150 per put contract, a nice profit for practically no effort on your part.

- Buy/writes. You can buy TGT stock now and sell covered calls around the key dividend dates. Again, be aware that if you buy TGT now, for example, around $53.50, sell July $55 calls for around $190 per contract, and the stock price goes to, say, $58 in late June, do not be surprised if your calls are assigned before the dividend ex-date in August.

- Buy and hold for the income. You could do a lot worse than collecting 4.5% on your investment, plus you have a reasonable expectation of once-a-year dividend increases. That sure beats the 0.2% interest you can get on savings, or even the roughly 3% you can get from long-term federal debt. Which is the better run enterprise, our federal government, or Target Corporation?

If all that isn't enough to make you like TGT, I can add this: TGT has given 5 percent of its profits to the communities it serves since 1946. Today, that means TGT hands out millions every week to local communities.

Best of luck to you in all your trading and investing endeavors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.