Updated on March 8th, 2022 by Felix Martinez
Every year, we publish a review of each of the Dividend Aristocrats, a group of 66 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 66 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 50 consecutive years. Target is 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 $105.6 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 $104 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 and supply chain issues, which weighed heavily on the U.S. economy in 2020-2021. Thus, Target has faced a very challenging backdrop. However, the company continues to report excellent financials.
Fourth-quarter adjusted earnings-per-share came to $3.19, which was 19.5% higher in the same period a year ago. Quarterly revenue increased 9.4% to $30.9 billion, missing expectations by $380 million. Comparable sales were up a staggering 20.5% in Q4, reflecting traffic growth of 6.5%.
Store comparable sales were up 19.3%, while digital comparable sales more than doubled year-over-year. Same-day services, which include Order Pick Up, Drive Up, and Shipt, grew substantially during the fourth quarter.
We estimate that the company can offer 4% annual earnings growth through 2027 due to improvements in business fundamentals.
Source: Target infographic
Target performed better in 2021 than in previous years, despite the coronavirus pandemic and supply chain issues. If anything, Target benefited from the pandemic as it forced more consumers to stay home and stockpile goods.
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 32.4% hike in 2021.
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 $210, Target has a price-to-earnings ratio of 14.4. 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 increased by 5.7% 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 the opposite directions. Therefore, Target’s dividend yield is down to multi-year lows of 1.7%, 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:
- 4% earnings growth
- 5.7% multiple reversion
- 1.7% dividend yield
In total, Target could offer shareholders an annual return of 11.4% through 2027. This is an attractive rate of return for such a great and recession-proof company.
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.
Thus, we feel that the current valuation is very attractive. As such, we rate shares as a buy and encourage investors to buy shares if they are looking for a high-quality recession-proof company like Target.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The 20 Highest Yielding Dividend Aristocrats
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 40 stocks with 50+ years of consecutive dividend increases.
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: