Friday, August 9, 2013

Stock Analysis of Target

Target Corporation (TGT) operates general merchandise stores in the United States. The company is a dividend champion, which has paid dividends since 1965 and increased them for 46 years in a row.

The company’s last dividend increase was in June 2013 when the Board of Directors approved a 19% increase to 43 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 7.60% to its shareholders.

The company has managed to an impressive increase in annual EPS growth since 2004. Earnings per share have risen by 9.40% per year. Analysts expect Target to earn $4.36 per share in 2014 and $5.46 per share in 2014. In comparison Target earned $4.52/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 18.60% per year over the past decade, which is higher than to the growth in EPS.

An 18.60% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1974 we see that Target has actually managed to double its dividend every five and a half years on average.

The dividend payout ratio has increased from 13 % in 2004 to 29.20% in 2013. 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 16.90 times earnings and has an adequately covered dividend but only yields 2.40%. In comparison, rival Wal-Mart (WMT) trades at 15.10 times earnings and yields 2.50%. Target could be a decent addition to a portfolio on dips below $69; however Wal-Mart (WMT) continues to be my preferred way to play big box retailers.

Full Disclosure: Long WMT

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1 comment:

  1. Thanks for the nice analysis here, plus the bonus information about Walmart. It does sound better than Target, though you have not discussed the dividend history or payout ratio of Walmart.

    By the way, there's a typo here: "Analysts expect Target to earn $4.36 per share in 2014 and $5.46 per share in 2014." I'm guessing the first year should be 2013.


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