A few weeks ago I bought 15 shares of Target (TGT) for $67.40 per share. I’m pretty sure most people know of the company and what their core business is, but just in case, a quick overview. From Yahoo Finance, “Target Corporation operates as a general merchandise retailer. It offers household essentials, food and pet supplies, and home furnishings and décor. As of January 30, 2016, the company operated 1,792 stores in the United States. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota.” Target is a Dividend Champion who has raised their dividends for 49 consecutive years.
There has been a lot of chatter around the discount retail industry lately, and the struggles of companies like Walmart (WMT) and Target (TGT) have people convinced that Amazon (AMZN) is the future and will soon render companies like Walmart and Target obsolete. Now, don’t get me wrong, I love Amazon, use their services all the time and do think the future is very bright for Amazon. Side note – I don’t think Amazon is a great investment, as it would violate all my core tenants when it comes to individual stocks. Anyways, when it comes to long term viability, I think Target has struck a nice balance. Their online business has shown some signs of growth recently reporting a 26% increase in digital sales during the last earnings call on November 16th, 2016. The online business growth, coupled with the best in-store experience for a general discount retailers, has diversified Target’s position for future growth. Target’s management has communicated plans to use its stores as distribution centers for its online business which I think this is a great strategy. Additionally, I think Amazon will eventually copy this strategy and they have already hinted at opening grocery stores. Targets strategy will drive more digital business in conjunction with additional brick-and-mortar business. I see this working by folks inevitably buying additional items in-store after they show up to retrieve the items already ordered online. Undoubtedly, there is a big shift in the discount retail space towards digital, but I still believe folks will need to run out and pick up some body wash, headphones or last minute birthday presents. I think Target is uniquely positioned to effectively meet market needs. This sentiment is also shared by other dividend growth investors and is why Target is one of five a “always buy” stocks on the Dividend Diplomats list.
When you combine these general trends with some very strong foundational metrics, it tells a very compelling story. TGT is currently yielding a very healthy 3.49% paying out a dividend of $2.40 annually. With very strong fundamentals, an attractive current yield and a payout ratio of only 46.6 – I think there is plenty of room to grow the dividend in the future as well. With the exception of 2015, EPS and free cash flow have been relatively stable over the past 5 years which speaks to the stability and viability of this organization. Normally, I would like to see more EPS growth, but with the size of the company, state of of the industry and recent missteps by TGT like Canadian expansion – I think stable EPS and FCF actually is very positive all things considered.
The P/E region is 13.35 which is well below the 5 year average of 17. My current fair value for TGT is $77, so I was very happy to pick up some shares for $67.40.