Target: A Dividend King With Increasing Online Sales And New Stores To Drive Future Growth
Summary
- Target’s total return overperformed the Dow average for my 62-month test period by 71.23%, which is great, and the present entry point is good.
- Target’s dividend yield is average at 1.5% and has been increased for 52 years in a row; a solid dividend income company.
- Target’s cash flow is good and will allow increased dividends each year, adding new stores and share buybacks.
Target (NYSE:TGT) is a buy for the total return and the conservative dividend growth investor. Target is being reviewed for an open position of The Good Business Portfolio, being my IRA portfolio of good business companies that are balanced among all styles of investing.
As I have said before in previous articles.
I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of guidelines, please see my article “The Good Business Portfolio: Update to Guidelines, March 2020”. These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keep me ahead of the Dow average.
The Good, Buy Now
Target is a general merchandise retailer selling products through its stores and digital online website. Its digital site includes a range of general merchandise, including a range of items found in its stores, along with an assortment, such as additional sizes and colors sold only online. TGT is a conservative investment for the income investor who also wants good growth potential as the online business is expanded.
Target has good cash flow at $7.5 billion, and the company uses some of the cash to expand its product lines and to increase dividends each year. The great year of growth came at the right time for TGT since it was already starting to improve its online capability and merchandising development. A quote from the 4th quarter earnings call by the CEO Brian Cornell sums up the good expectations for the company's method of constant improvement.
Even before the dramatic challenges of last year took hold, our team had been busy building the retail platform of tomorrow, but 2020 accelerated everything and, as such, our guests are already benefiting from and loving that platform today. As we designed our strategy and invested accordingly, we relentlessly asked ourselves what products and services those stores should offer, where they should be located, how their operations should be tailored to meet neighborhood needs, and ultimately how to make our stores work together with all of our other assets as one shopping platform that would keep guests turning to Target; however, they want to shop. In answering those questions, we did two things at once. We placed the physical store more firmly at the center of our omnichannel platform, and we created a durable, sustainable, and scalable business model that puts Target on a road of our own. Our goal was to use our proximity, nearly 1,900 stores within 10 miles of the vast majority of the U.S. consumers, to offer the fastest and easiest digital fulfillment in retail and the capabilities we’ve built to become America’s easiest place to shop.
One of the main reasons to own TGT is to have a steady quarterly income with the potential for good growth as the vaccines control the COVID virus, and people get back to work and can spend more. Target does meet my dividend guideline. Target has a below-average dividend yield of 1.5% and has had increases for 52 years, a dividend king, making Target a good choice for the dividend growth investor that wants consistent growing income.
The dividend was last increased in June 2020 for an increase from $0.66/Qtr to $0.68/Qtr or a 3% increase. The five-year average payout ratio is low at 44%, which allows cash to remain for increasing the business of the company by adding new stores and new products. The cash flow drives TGT stock price up, and the company returns the cash to the shareholder with increasing dividends each year and share buybacks when the COVID virus is controlled.
I look for the earnings of my positions to consistently beat their quarterly estimates. For the last quarter, on March 2, 2021, Target reported earnings that beat expected at $2.73 by $0.29, compared to last year at $1.63. Total revenue was higher at $28.34 billion more than a year ago by 21.1% year over year and beat expected total revenue by $920 million. This was a great report with a bottom line beating expectations, and the top line increasing, and the bottom line beating compared to last year.
The next earnings report, Q1, will be out in June 2021 and is expected to be $1.90 compared to the previous year at $0.59, a good increase. By Q1, the COVID virus should be well under control with the workforce back to normal, which will allow TGT to return to its normal strong yearly growth as 20-30 stores are added to its existing 1880 stores.
The great TGT total return of 143.59% compared to the Dow base of 72.36% over my 62-month test period makes TGT a fantastic investment for the total return investor. The steadily increasing dividend income for 52 years keeps TGT as a buy at the current price. Looking back five years, $10,000 invested five years ago would now be worth over $27,300 today. This gain makes Target a good investment for the income investor looking back, which has future growth as earnings increase as the COVID-19 virus is controlled by this summer. Overall, Target is a good business with an S&P CFRA 3-year CAGR of 23% projected growth as the United States and foreign economies grow going forward, with the increasing demand for TGT’s merchandise.
This shows the feelings of the CEO and the fundamentals for the continued growth of the Target business and shareholder return. TGT has good growth long term and will continue as the world’s workforce returns after the COVID virus is controlled, growing the world economy. The company is not giving financial guidance for this year, but the fundamentals shown above indicate projected growth as they adjust to the changing world conditions from the COVID-19 pandemic.
S&P CFRA recently increased its one-year target price to $225, giving you a possible gain of 29% in a year and making TGT a good buy at this time. The projected one-year PE is about average at 20 which shows that TGT is undervalued now compared with the 23% CAGR projected growth. This PE is above the five-year PE of 17 but is easily compensated by the recent online growth.
Risks and Negatives of the business
The obvious risk for TGT is that another mutation of the COVID virus will not be controlled by the vaccines used today, and we have another downturn until a new vaccine is developed. TGT has great products, and they keep adding new products to improve their sales, but the business they are in is extremely competitive, so they must keep up with the competition offering more products and faster service.
It is expected that this summer the COVID virus will be controlled in the United States and TGT’s plan to continue to grow online sales in competition with Amazon (AMZN) and Walmart (WMT) will use more cash than they planned, which may cause earnings to miss this year but should grow nicely in the next year as they build their delivery system. They have to compete on the last mile delivery service which Amazon has built for years and play catch-up.
Conclusions
Target is a good investment choice for the total return and dividend growth investor with its slightly below-average dividend yield with increases for 52 years and high total return. Target is being considered for the Good Business Portfolio and will be added to the portfolio add list when the COVID virus outcome is better defined. I buy what I consider great businesses that are fairly priced. Good growing businesses do not come cheap, but over time, they grow and grow. If you want a solid growing dividend income and good total return potential in the retail business, TGT is the right investment for you.
The total return for the Good Business Portfolio is ahead of the Dow average from 1/1/2020 to February 26 by 1.29%, which is a gain above the market gain of 1.07% for a total portfolio gain of 2.36%. Each quarter after the earnings season is over, and I write an article giving a complete portfolio list and performance. The latest article is titled “The Good Business Portfolio: 2020 4th Quarter Earnings and Performance Review.”
This article was written by
Analyst’s Disclosure: I am/we are long BA, JNJ, HD, DHR, MO, PM, MCD, PEP, DLR, AMT, ADP. 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.
Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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