Target Vs. Wal-Mart, A Practical Guide For The Dividend Growth Investor

Includes: TGT, WMT
by: The Investing Engineer

When I'm looking to invest in a company, the most influential aspect in my decision will be my experience with that company. Anyone who actively reads my articles will know this of me. For the average investor trying to support retirement or make some money on the side, there's a limit to how much useful information you can get from examining fundamentals. That group includes me, so what I tend to rely on is trust in well written articles examining the few fundamentals that I do understand. If I can get first-hand knowledge of the products and services however, this gives me more information than I could ever hope to get from a quarterly report.

An example of this is Facebook (NASDAQ:FB). I've been registered with the website for about 8 years now, and I can't remember ever clicking an ad on it. I've seen friends on Facebook and I've never seen them click ads either, or engage in any activity that would make the company profit. I know that FB can sell information (which it has a lot of) for a profit, but I also know from my experience that targeted ads are wasted on uninterested viewers, which seems to be everyone. In May of this year, this was confirmed when General Motors (NYSE:GM) decided to stop advertising on Facebook, saying that the ads didn't pay off. The importance of this is that anyone who uses Facebook could have predicted that something like this would happen and that it will most likely happen again unless something fundamental changes about the way the company advertises. It doesn't take an earning statement to decide whether or not FB is a good investment.

Since my readers are very smart, you've probably already figured out that I used this strategy to decided whether or not to invest in Target (NYSE:TGT) or Wal-Mart (NYSE:WMT). Let me jump ahead and tell you that I own shares in both companies. I don't think they're evenly matched, however. For anyone who's been to both stores, I hope you can relate.

The Experience
The most apparent difference between Target and Wal-Mart is the experience, and the kind of customer it attracts. Without getting into stereotypes, my shopping trips to Wal-Mart tend to be more product driven; get in, find what I need for a good price, and get out. I find that this attracts someone who's looking to get what he or she needs, and not spend a lot of money. It's a good strategy. People like saving money.

Target has the same low price objective, but for such a close competitor, I find the experience to be completely different. I can't exactly put my finger on what causes it, but I actually enjoy going there. Maybe it's the layout of the store, or some subtle hypnotic message hidden in the target symbols on the shopping bags, but I never feel like I want to get in and out of there as fast as possible.

I live in New Jersey, where the Wal-Marts don't have the fresh produce or wine and liquor sections of out of state Wal-Marts. The Targets near me tend to have a much more extensive food selection, including produce. I concede that this comparison, while fair for me, may not apply to someone else who shops at different Wal-Marts and Targets. I completely expect that there are people with the exact opposite experience as me, enjoying Wal-Mart trips while shying away from Target. Relying on my own judgment however, if I had to make a call based on just shopping there, I would put my money in Target.

The News
Luckily, I don't only have to rely on my shopping experience at the two stores. I know from reading up on the companies that they both tend to copy what the other is doing right. In the engineering world, we don't like to say stealing, so we use the term "benchmarking". Benchmarking is what pushed upper management at Target to greatly expand on the food selection, something that I've benefited from greatly. It also got Wal-Mart into selling actual designer brand clothes instead of made up brands.

If Google (NASDAQ:GOOG) is telling the truth, Target is offering the lowest prices, and its expanded food selection is having a positive impact. Wal-Mart, on the other hand, had very little success with designer brand clothes, and in 2010, the high-fashion-foray came to an abrupt end. In 2011, Wal-Mart launched a campaign to stop benchmarking against Target's clothing department and decided to go back to basics, focusing on the products that made them successful, with the lowest prices they could give.

Almost a year later, Wal-Mart is finding success again in revisiting its core strategy and Target has maintained a classier selection of clothing and other products, giving itself an advantage that Wal-Mart might not try to compete with again. Because of the success of both companies, and their ability to easily adapt, I can' give a real advantage to either one.

The Fundamentals
As a dividend growth investor, there's a short list of fundamentals I go through, as long as everything above checks out. Price per earnings is low an evenly matched for both TGT and WMT. At the current price, TGT has a slightly higher dividend yield of 2.30% versus 2.13% of Wal-Mart. Since I plan on holding for a very long time, this difference in yield is negligible to me. Dividend growth is where I focus. Since 2008, Target has increased its dividend 14%, 5.8%, 41%, 20%, and 20%, for an average of about 20% per year. In the same time period, Wal-Mart has increased its dividend by 9%, 12.5%, 11%, 23%, and 8%, for an average of about 12.8%. Looking at these numbers (and praying that past performance has some sort of correlation with future performance), Target is the clear winner.

I awarded two of my tests two Target, and the third was a tie. My recommendation, obviously, is to go with Target. So now, smart reader, why do I have both of them in my portfolio? Based on the past few years I think Target is the clear choice, but Wal-Mart has changed it up a bit and the company seems to be back on track. The dividend growth for that period wasn't as high as Target's growth, but they were still impressive numbers. If Wal-Mart gets better, so will the growth. I also concede that unlike Facebook, I don't think there's any chance of Wal-Mart going away in the near future. Even when you throw Amazon (NASDAQ:AMZN) into the picture, in a worst case scenario for Target and Wal-Mart, it will take a long time for Amazon to cause real damage. And if that starts to happen, I'll know before the analysts on Wall Street because I'll notice the empty stores and find myself much less frustrated with the lengths of the checkout lines.

Disclosure: I am long TGT, WMT. 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.