Target: Don't Discount This Consistent Dividend Payer

| About: Target Corporation (TGT)
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With a still tepid economic recovery casting a shadow over the retail sector, Target's (NYSE:TGT) June sales for stores open at least a year were up only 2.1 percent from the year-ago comparable period. And as consumers continue to feel the pinch of a lackluster economy, the near-term outlook doesn't look good for the 50-year old company.

However, given its growth plans and history of consistent dividend payouts, investors shouldn't discount the retailer just yet. The company is looking to boost its annual sales to $100 billion by 2017, from $68.5 billion for 2011, and aiming to almost double its earnings per share by 2017 to at least $8, from $4.28 in 2011.

To achieve its goals, the company is looking to open up as many as 135 stores in Canada in spring 2013, eventually growing to 200 stores north of the border. As well, Target is getting ready to set up "CityTarget" stores in the urban centers of Chicago, Seattle, San Francisco and Los Angeles this year. The retailer's strategy is to make its "value meets style" wares more accessible to urban consumers in these cities who might otherwise have to drive greater distances to a more suburban location to get their Target fix.

For the 2012 Christmas shopping season, Target and Neiman Marcus have teamed up to offer wares from 24 leading designers at Target stores. Target has also offered designer brand names like Missoni in the past, offering customers a chance to get higher-profile offerings at a discounted price. Additionally, the retailer is offering wares from other retailers, including Apple offerings at a few locations, in a "stores-within-the-store" approach.

Target has shown a pattern of performance in the last few years that holds promise for its ability to deliver on its future plans. From its 2006 fiscal year to the 2011 period, the retailer has seen sales grow 18 percent, from $57.87 billion. The number of stores has grown more than 18 percent over this period as well, from 1,488 to 1,763. Earnings per share have risen one-third, from $3.21 to $4.28.

However, while Target has added to its retail square footage from 2006 to 2011, its revenues per square foot are down from $316 to $294 over this period. To combat recessionary decline, Target has expanded its food offerings in recent years, so that food and pet supplies made up 19 percent of the company's sales by product type for 2011, from 16 percent for 2009. The number of SuperTarget stores, offering a wider range of food offerings, has grown from 177 in 2006 to 251 in 2011.

Target also offers credit cards to facilitate customers' shopping experiences, but is looking to sell its credit card receivables portfolio.

As for its recent performance, Target has reported EPS of $1.04 per share for the first quarter of 2012, up 5 percent from the 2011 comparable period. Expenses related to the company's plans for Canadian market entry cut into first quarter EPS to the extent of $0.80 per share, Target reports.

For the second quarter, Target is anticipating EPS in the range of $0.94 to $1.04, and as much as $1.14 after adjusting for the impact of expenses related to Canadian market entry. For fiscal year 2012, Target is anticipating EPS in the range of $4.10 to $4.30, and as much as $4.60 to $4.80 after adjustments for its entry into the Canadian market.

As for its consistent dividend payouts, Target boasts that it hasn't missed a payment since it first became public in October 1967. For the first two quarters of 2012, the company paid out $0.30 per share, and is boosting its quarterly dividend by 20 percent to $0.36 per share from the third quarter on. This makes for a dividend yield of more than 2.15 percent at Target's current stock price of about $61. What is more, the company has plans for share repurchases, looking to spend up to $5 billion in the next couple of years. Target recently completed $10 billion in share repurchases.

In terms of its competitive position, Target's gross margin of 0.30 is at about the industry average of 0.32, and compares favorably to competitors Walmart (NYSE:WMT), at 0.25, and Costco (NASDAQ:COST), at 0.12. Target's operating margin (0.08) also compares favorably to Walmart's (0.06) and Costco's (0.03).

Target's price to earnings of over 14 for the trailing 12-month period is much better than the industry average of about 25. It is also better than Costco's and Walmart's PE of over 26 and 15.5, respectively. On a forward basis, Target's PE of 12.6 is in-line with Walmart's 13.6. Target's PE growth ratio, with anticipated growth over the next five years, is merely 1.27. Walmart's is 1.79.

It appears that Walmart is poised for stronger growth than Target, considering Walmart's ability to grow in developing countries. Also, Target is likely to find it more difficult and expensive to expand in urban U.S centers, rather than the suburbs and exurbs, to drive domestic growth. And Target always has to deal with the specter of changing consumer tastes.

However, investors looking for a steady dividend without the impacts of the "headline risk" that Walmart poses should be favorably inclined towards Target.

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