Updated on March 9th, 2021 by Bob Ciura
Every year, we publish a review of each of the Dividend Aristocrats, group of 65 companies in the S&P 500 Index with 25+ consecutive years of dividend increases. We believe the Dividend Aristocrats are among the best dividend stocks to buy, due to their long histories of annual dividend increases, and strong business models.
With that in mind, we created a list of all 65 Dividend Aristocrats. You can download your copy of the Dividend Aristocrats list (along with important metrics like dividend yields and price-to-earnings ratios) by clicking on the link below:
Next up on our list of Dividend Aristocrats is Target Corporation (TGT).
Target has a long history of dividend growth. The company has increased its dividend for 49 consecutive years. One more year of dividend growth will qualify Target as a Dividend King, an even more exclusive list of companies that have increased dividends for at least 50 consecutive years.
Target has been one of the best performing retail stocks over the past year, due to its execution on numerous growth initiatives. While the stock appears overvalued today, Target remains a premier dividend growth holding.
Target is a discount retail giant. It has a market capitalization in excess of $86 billion. Today, it operates approximately 1,850 stores in the U.S., as well as an e-commerce business. It has a diverse product lineup, with annual sales of more than $90 billion.
This is a difficult period for all of retail. The escalating threat of Internet retailers is disrupting the entire brick-and-mortar retail industry. Add to this the coronavirus pandemic, which weighed heavily on the U.S. economy in 2020, and Target has faced a very challenging backdrop. However, the company continues to report excellent financials.
Fourth-quarter adjusted earnings-per-share came to $2.67, which was two-thirds higher than in the same period a year ago. Quarterly revenue increased 21% to $28.3 billion, beating expectations by nearly $1 billion. Comparable sales were up a staggering 20.5% in Q4, reflecting traffic growth of 6.5% and average ticket size of +13.1%.
Store comparable sales were up 6.9%, while digital comparable sales more than doubled year-over-year. Same-day services, which include Order Pick Up, Drive Up, and Shipt, grew 212% during the fourth quarter, with Drive Up growing more than 500%.
We estimate that the company can offer 6% annual earnings growth through 2024 due to improvements in business fundamentals.
Target performed better in 2020 than in previous years, despite the coronavirus pandemic. If anything, Target benefited from the pandemic as it forced more consumers to stay home, and stockpile goods. According to Target, the company added $15 billion in sales growth last year, more than the previous 11 years combined.
The biggest reason for this excellent growth, is that Target has invested heavily in growing new sales channels, which have paid off. First, Target has invested heavily in e-commerce. The rise in e-commerce initially caught many retail companies, including Target, flat footed. Target has really revamped its online offerings and has seen incredible growth rates.
Source: Target infographic
Target has also rolled out its same-day fulfillment service. Lastly, the company continues redeveloping stores and building smaller stores with much less square footage, in places that cannot provide the necessary space to build a large store. They are located in areas that see high traffic, such as densely-populated large cities and college campuses.
Taken together, these measures have had a significant impact on Target’s growth.
Competitive Advantages & Recession Performance
Target operates in a difficult industry. Retail is highly competitive. For consumers, retail brands often take a back seat to price and convenience.
This is why Target has invested so heavily in store redevelopment. That has enabled the company to retain its brand strength, even in a fiercely competitive industry. Most importantly, it has massive distribution and scale capabilities, which allow it to keep prices low.
In addition, Target operates in a defensive niche of the retail business. Discount retail tends to hold up relatively well during economic downturns, when consumers will typically shift from higher-priced retailers.
Target’s earnings-per-share during the Great Recession are as follows:
- 2007 earnings-per-share of $3.33
- 2008 earnings-per-share of $2.86 (14% decline)
- 2009 earnings-per-share of $3.30 (15% increase)
- 2010 earnings-per-share of $3.88 (17% increase)
- 2011 earnings-per-share of $4.28 (10% increase)
Target was remarkably resilient during the Great Recession. It suffered a 14% decline in 2008, but followed this with three consecutive years of double-digit earnings growth. Target once again performed very well in 2020, a year in which the U.S. economy entered a recession due to the pandemic. And yet, Target continues to increase its dividend reliably each year, including a 3% hike in 2020.
Valuation & Expected Returns
Due to the returns in share price this year, Target’s valuation has reached heights not seen very often over the last decade. Based on the current share price of $177, Target has a price-to-earnings ratio of 20.4. Our fair value multiple is 18. If shares were to revert to their average price-to-earnings ratio, then holders of Target stock would see annual returns reduced by 2.5% over the next five years due to valuation.
At the same time, Target’s rising share price over the past few years has reduced its dividend yield, since stock prices and dividend yields move in opposite direction. Therefore, Target’s dividend yield is down to multi-year lows of 1.6%, which makes the stock less attractive for new investors looking for income.
In addition, Target can generate returns from earnings growth and dividends. A breakdown of total returns is as follows:
- 6% earnings growth
- -2.5% multiple reversion
- 1.6% dividend yield
In total, Target could offer shareholders an annual return of 5.1% through 2026. This is a low rate of return, but not surprising given how well the stock has done over the past year.
There is no question Target had struggled dealing with the rise of e-commerce shopping along with the rest of retail, but the company appears to have righted itself and growth has returned. Same-store-sales were higher than expected and digital sales continue to impress given the highly competitive environment for the retail industry. Store improvements have also led to an increase in customer traffic.
However, we feel that the current valuation is too rich. In a way, Target is a victim of its own success–the massive rally in share price over the past year has pushed the valuation well above our fair value estimate. As such, we rate shares as a hold and encourage investors to wait for a pullback before buying stock in Target.