Updated on September 29th, 2023 by Bob Ciura
Target Corporation (TGT) has increased its dividend for 55 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 50 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.
Target posted second quarter earnings on August 16th, 2023, and results were somewhat mixed. Adjusted earnings-per-share came in well ahead of estimates at $1.80, which was 38 cents better than expected. Revenue was $24.8 billion, down 4.9% year-over-year, and missing estimates by $460 million.
The company also lowered its full-year sales and profit expectations due to weakening sales, but rising margins. Comparable sales fell 5.4%, which was much weaker than the -1.7% expected. The company said it was seeing continued growth in consumables such as essentials, beauty, food, and beverages.
However, weakness in discretionary categories weighed on results. Same-day services grew about 4%, led by 7% growth in Drive-Up.
Growth Prospects
Target’s growth has accelerated in the past few years. Its growth was only slightly impacted by the coronavirus pandemic of 2020, showing 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.
Source: Investor Presentation
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 10% 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 niche of the retail business. 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. It suffered a 14% decline in 2008 but followed this with three consecutive years of double-digit earnings growth.
Target 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.
Valuation & Expected Returns
We expect Target to generate earnings-per-share of $7.60 this year. As a result, the stock is currently trading at a price-to-earnings ratio of 14.5. This is below our fair value estimate of 16.0 times earnings, meaning the stock appears slightly undervalued right now.
If the P/E multiple expands from 14.5 to 16.0 over the next five years, shareholder returns would be increased by 2.0% per year.
In addition, Target shares currently yield 4.0%. And we expect 10% annual EPS growth over the next five years. Putting it all together, Target stock is expected to generate annual returns of 16.0% over the next five years.
Final Thoughts
After raising its dividend this year, Target eclipsed 55 years of annual dividend increases. As a result, Target has cemented its position in the exclusive Dividend Kings list.
It has maintained so many years of dividend increases due to its leading position in the retail industry. It has also adapted to the difficult climate for brick-and-mortar retailers extremely well, thanks to new store formats and huge investments in e-commerce.
The company should benefit from these growth catalysts. This should allow Target to continue raising its dividend for many years to come.
Target stock exhibits high total return potential. We expect double-digit annual returns for Target stock over the next five years, making the stock 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.