Updated on October 30th, 2024 by Felix Martinez
Target Corporation (TGT) has increased its dividend for 56 consecutive years. As a result, Target has a position on the exclusive list of Dividend Kings.
The Dividend Kings have raised their dividend payouts for at least 50 consecutive years.
You can see all 53 Dividend Kings here.
You can download the full list of Dividend Kings, plus important financial metrics such as dividend yields and price-to-earnings ratios, by clicking on the link below:
To raise dividends for 50+ years in a row, a company must have durable competitive advantages and long-term growth potential. It must also possess a recession-resistant business and a management team that is committed to increasing the dividend each year.
Target possesses all of these qualities.
This article will discuss Target’s business model, growth catalysts, and expected returns.
Business Overview
Target was founded in 1902. Today, its business consists of about 1,850 big-box stores. These stores offer general merchandise and food, and also serve as distribution points for its e-commerce business. Target should produce about $107 billion in total revenue this year.
In its second-quarter 2024 earnings report, Target Corporation announced a 2.0% increase in comparable sales, aligning with the higher end of its expectations. Store and digital traffic rose by 3% overall, with digital sales up by 8.7%, and same-day services like Drive Up showing double-digit growth. Discretionary categories also performed well, notably with apparel sales increasing by over 3%. Operating income surged to $1.6 billion, a 36.6% rise from the previous year, with a 6.4% operating income margin, up from 4.8% in 2023, driven by improved gross margins. This resulted in GAAP and Adjusted EPS of $2.57, marking a 40% year-over-year increase.
For the upcoming third quarter, Target projects a 0–2% comparable sales increase and expects GAAP and Adjusted EPS between $2.10 and $2.40. While the company’s full-year guidance remains at a comparable sales increase of 0–2%, it anticipates results to land at the lower end of this range. Following strong performance in the first half, Target adjusted its full-year EPS outlook to $9.00–$9.70, raised from an initial estimate of $8.60–$9.60. CEO Brian Cornell attributed this growth to both in-store and digital traffic, emphasizing success in same-day delivery services and strategic improvements in apparel and beauty categories.
Target’s second-quarter operating results revealed total revenue of $25.5 billion, up by 2.7%, fueled by a 10.8% increase in other revenue. The gross margin rate improved to 28.9%, bolstered by cost improvements and favorable category mixes, although offset by higher digital and supply chain expenses. Net interest expense decreased to $110 million from $141 million last year, while the effective income tax rate slightly increased. The company maintained shareholder returns through a 1.9% dividend increase and $155 million in share repurchases.
Source: Investor Presentation
Growth Prospects
Target’s growth has accelerated in the past few years. The coronavirus pandemic of 2020 only slightly impacted its growth, which shows the strength of Target’s stores and e-commerce businesses.
Target has invested heavily in growing new sales channels, which have greatly paid off.
First, Target has invested heavily in e-commerce. The rise in e-commerce initially caught many retail companies flat-footed. Target has really revamped its online offerings and has seen incredible growth rates.
Target’s digital efforts are also working extremely nicely, as we saw again in Q2 results, and the company’s small-format stores are performing very well, opening a new avenue of growth for the company in the coming years.
Share repurchases will be an additional catalyst for earnings-per-share growth. The company has reduced its share count by about -4.8% per year in the last six years.
Overall, we expect Target to grow earnings-per-share by 9% per year over the next five years.
Competitive Advantages & Recession Performance
Target operates in a difficult industry – the highly competitive retail industry. 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 retail niche. Discount retail tends to hold relatively well during economic downturns, when consumers 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)
Target was remarkably resilient during the Great Recession. Although it suffered a 14% decline in 2008, it followed this with three consecutive years of double-digit earnings growth.
Target again performed very well in 2020, when the U.S. economy entered a recession due to the pandemic. And yet, Target continues to increase its dividend reliably each year.
Valuation & Expected Returns
We expect Target to generate earnings-per-share of $9.50 this year. As a result, the stock is currently trading at a price-to-earnings ratio of 15.5. This is below our fair value estimate of 17.0 times earnings, meaning the stock appears undervalued right now.
If the P/E multiple expands from 15.5 to 17.0 over the next five years, shareholder returns will be increased by 1.5% per year.
In addition, Target shares currently yield 3.0%. We expect 9% annual EPS growth over the next five years, so Target stock is expected to generate annual returns of 13.5% over the next five years.
Final Thoughts
After raising its dividend this year, Target eclipsed 56 years of annual dividend increases, cemented its position in the exclusive Dividend Kings list.
Due to its leading position in the retail industry, it has maintained so many years of dividend increases. It has also adapted extremely well to the difficult climate for brick-and-mortar retailers, thanks to new store formats and huge investments in e-commerce.
These growth catalysts should benefit the company, allowing Target to continue raising its dividend for many years to come.
Target stock exhibits high total return potential. We expect double-digit annual returns over the next five years, making it a buy.
The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors:
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~400 stocks with 10+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- 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.