Published on October 10th, 2022 by Quinn Mohammed
Target Corporation (TGT) recently increased its dividend by 20%, representing the company’s 51st consecutive annual raise.
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 45 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.
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 $110 billion in total revenue this year.
Target reported second-quarter earnings on August 17th, 2022, and results were behind revenue and adjusted profits expectations.
Total revenue was $26.0 billion, up 3.5% year-over-year. Revenue missed expectations by $30 million.
Store comparable sales were up 2.6% year-over-year, while digital comparable sales were up 9%, extending the company’s strong digital comparable sales streak.
Target saw impressive results from same-day services, which grew nearly 11%.
Source: Investor Presentation
The company maintained its prior guidance for full-year revenue growth in the low- to mid-single-digit range.
Target is experiencing some margin pressure as various costs rise. Gross margins came to 21.5% in Q2, which was down from 30.4% in the year-ago period.
The gross margin rate reflected higher markdown rates, higher merchandise, inventory shrink, freight costs, increased compensation and headcount, and higher shipping costs.
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.
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. In the 2022 second quarter, the company repurchased $2.6 billion of its shares, retiring 12.5 million shares of common stock.
Target still has $9.7 billion remaining on its share repurchase authorization. This represents approximately 13.8% of the company’s current market cap, meaning share buybacks will significantly boost EPS growth.
Overall, we expect Target to grow earnings-per-share by 12% 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)
- 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 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 massive 32% dividend increase in 2021 and a strong 20% dividend increase in 2022.
Valuation & Expected Returns
We expect Target to generate earnings-per-share of $8.10 this year. As a result, the stock is currently trading at a price-to-earnings ratio of 18.9. This is above our fair value estimate of 17.0 times earnings for the stock.
As a result, we view the stock as overvalued right now.
If the P/E multiple declines from 18.9 to 17.0 over the next five years, shareholder returns would be reduced by 2.1% per year.
As a result, valuation is not expected to be a meaningful driver of shareholder returns at this P/E multiple. Therefore, shareholder returns will be derived from future earnings-per-share growth and dividends.
Target shares currently yield 2.8%. And we expect 12% annual EPS growth over the next five years.
Putting it all together, Target stock is expected to generate annual returns of 12.1% over the next five years.
After raising its dividend by 20% in June, Target eclipsed 51 years of annual dividend increases. As a result, Target has cemented its position in the exclusive Dividend Kings list.
It has maintained 51 consecutive 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.
Despite an elevated valuation compared with its historical averages, Target stock still has respectable expected total returns. We expect low 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 ~350 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.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Best DRIP Stocks: The top 15 Dividend Aristocrats with no-fee dividend reinvestment plans.
- The 2022 High ROIC Stocks List: The top 10 stocks with high returns on invested capital.
- The 2022 High Beta Stocks List: The 100 stocks in the S&P 500 Index with the highest beta.
- The 2022 Low Beta Stocks List: The 100 stocks in the S&P 500 Index with the lowest beta.
- The Complete List of Russell 2000 Stocks
- The Complete List of NASDAQ-100 Stocks