Friday, August 31, 2012

Stock Analysis of Target Stores

Target Corporation (TGT) operates general merchandise stores in the United States. The company is a member of the dividend aristocrats index, has paid dividends since 1965 and increased them for 45 years in a row. The company’s last dividend increase was in June 2012 when the Board of Directors approved a 20% increase to 36 cents/share. The company’s largest competitors include Wal-Mart Stores (WMT), Dollar Tree (DLTR) and Costco (COST). Over the past decade this dividend growth stock has delivered an annualized total return of 6% to its shareholders.

The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 10% per year. Analysts expect Target to earn $4.35 per share in 2013 and $4.86 per share in 2014. In comparison Target earned $4.28/share in 2012.
The return on equity has remained consistently in a tight range between 15% and 19%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 17.50% per year over the past decade, which is higher than to the growth in EPS.
A 17.50% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1988 we see that Target has actually managed to double its dividend every six years on average. The dividend payout ratio has increased from 13.30% in 2003 to 25.70% in 2012. The expansion in the payout ratio has enabled dividend growth to be faster than EPS growth over the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently, Target Stores is attractively valued at 14.40 times earnings and has an adequately covered dividend but only yields 2.30%. In comparison, rival Wal-Mart (WMT) trades at 16.10 times earnings and only yields 2.10%. Target could be a decent addition to a portfolio on dips below $57; however Wal-Mart (WMT) continues to be my preferred way to play big box retailers.

Full Disclosure: Long WMT

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Dividend Growth Stocks by Sector - Retail

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