This Dividend Aristocrat’s Growth Is Right On Target

The retail industry is subject to rapid change, thanks to the growing market share for online retailers such as Amazon (AMZN). Some brick and mortar retailers are adapting to this change better than others. Retail stocks often trade at inexpensive valuations, as the market is selling off shares of retailers all the same.

Target (TGT) is one of the retailers that has found a successful way to attract customers to its stores in a changing retail environment, while also having found a way to expand its own e-commerce business at the same time.

Target’s solid growth outlook and inexpensive valuation provide some share price growth potential, but the company’s shares offer an above-average dividend yield on top of that. When we factor in a consistent dividend growth track record and a low dividend payout ratio, Target looks like one of the best dividend stocks right now.

Company Overview

Target is a brick and mortar retailer that sells a wide range of merchandise, including apparel, beauty products, home products, but also food and beverages. The company’s stores are focused on the US.

Target has turned to e-commerce as well, the company has established itself as one of the leaders among brick and mortar retailers that expanded to e-commerce. The company has grown its online sales at a 25% plus rate for five years in a row.

Target is currently trading with a market capitalization of $41 billion, making it one of the more valuable brick and mortar retail companies. Target’s history dates back to 1902.

Recent Earnings Results And Growth Outlook

Target reported its first quarter earnings results in late May. The company was able to deliver a highly compelling growth rates for both its revenues, as well as for its profits. Revenue growth was driven by an increasing pace of comparable store sales. This isolates Target from other brick and mortar retailers, as peers, especially those from the apparel-focused department store sector, have had a much harder time growing sales at existing locations in recent quarters. Target’s comparable store sales rose by 4.8% during the first quarter, while revenues rose by a marginally higher pace of 5.1%.

Target is not opening a large amount of new stores, but the company continues to expand its store fleet continuously. In recent quarters, Target has been targeting urban spaces, where smaller-scale stores are opened. On top of that, Target continues to invest into existing stores in order to upgrade the shopping experience of its customers. This is a somewhat unique approach relative to peers, which are more focused on closing down under-performing stores. Target’s investments into its stores, that result in a modern and welcoming shopping experience, are one of the key factors for Target’s strong comparable store sales growth rates. The rollout of new brands plays a role as well, and Target has also started to work together with well-performing fashion brands in the recent past, which allowed the company to gain some market share from department stores in the apparel, footwear, and beauty segments.

Target should be able to grow its comparable store sales in the future as well, and thanks to operating leverage its profit margin should continue to expand going forward. On top of that, Target’s share repurchases allow for some additional earnings-per-share growth, as its company-wide net earnings are distributed over a lower amount of shareholders.

Target As An Income Investment

Companies that generate growth rates that are higher than those of their industry oftentimes do not provide overly high dividend yields, as cash flows are diverted towards the expansion of the company’s operations. Target has, despite generating better growth rates than most brick and mortar retailers, delivered a solid pace of dividend increases in the past, though.

Target’s dividend payments come in at $2.56 a year right now, which is roughly four times as much as the $0.66 that the company has paid out in 2009. Target has, therefore, increased its dividend at an annual pace of 14.5% throughout the last decade.

More recently, Target’s dividend growth rate has declined to a lower level, but the company continued to increase its payout during every single year, despite the market’s worries about the future of brick and mortar retail. At the current share price of $80, Target’s shares offer a dividend yield of 3.2%, which is attractive relative to what investors can get from the S&P 500 index right now.

Due to the fact that Target pays out just above 40% of this year’s expected net profits, the dividend looks quite safe on top of that, which is why we deem Target one of the most attractive income stocks at the current price. Since Target does not only offer discretionary consumer goods such as apparel, but also consumer staples such as food and beverages, its recession performance is relatively strong – customers shop at Target even during times when the economy is not doing well. The dividend should thus be safe during a recession as well.

Investor Takeaways

Target has managed to adapt to a changing retail environment in an exceptional manner: Through store upgrades, the introduction of a new store format, and attractive offerings such as home deliveries, Target has managed to provide a shopping experience that is well-received by its target demographic, which has resulted in above-average growth rates for Target’s store sales, as well as for its online sales.

Target is one of few brick and mortar retailers that forecasts strong earnings-per-share growth for 2019, and thanks to its strong business model the outlook beyond 2019 is not bad at all, either.

Target offers a lot to income investors as well, including consistent dividend growth, an above-average dividend yield, a safe payout ratio, and recession-resilience. Since shares are trading for just above 13 times this year’s net profits, which is not a high valuation for a quality stock such as Target, we believe that Target’s shares are attractively priced right now. It could thus make sense to take a closer look for income investors, as well as for those that seek total returns.

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