A month ago, on May 18, Target (NYSE: TGT) reported deeply disappointing non-GAAP EPS of $2.19 in the first quarter, missing expectations of $0.87. Additionally, as Wall Street expected the company’s operating margin to decline due to the macroeconomic crisis Pressure which weighs on the entire retail industry, few observers could have anticipated a decrease to 5.3 % against 9.8 % of one year on the other. Predictably, Target’s already plummeting stock price plunged from the nose, cutting a full quarter off the price:
At the May 17 closing bell, Target was selling for $215.29 per share. At the start of trading on May 18, shares were selling for $162.17, the stock’s worst one-day drop since Black Monday in 1987. After the company revised its budget guidance for the remainder of 2022 the last week, stocks fell again. Today, they sell for just under $140. That’s quite the drop from its 52-week high of $268.98 in November.
In the short and medium term, the sale seems justified. Target’s yield on invested capital rose from 30.7% a year to 25.3%, the gross margin increased from 30% to 27% compared to the same period of time, and the disturbances of the supply chain doesn’t seem to be dissipating anytime soon.
I completely understand traders and growth investors who offload Target.
But I’m a dividend growth investor, and even with Target stock prices likely to drop even further, I’m buying. Here’s why:
The company is valued (finally): As we all heard a d nausea, Detail stocks were hammered in 2022 and, as I mentioned at the top of this article, Target was one of the hardest touched retailers. Indeed, there is no way to give a positive turn to the contraction of the adjusted profits of 40% in the last quarter, but the fall in the course of the company’s action probably has more to do with the recent rise in the stock in the stratosphere during the last bull market than with the fundamental weaknesses of the long-term company. In fact, if we look at Target’s P/E ratio over the past five years, we see that the company’s average P/E ratio is around 16%. This year’s dizzying fall represents a return to the mean:
In other words, for those of us who believe the company is a good buy-and-hold stock, perhaps a very good time to buy stock at a much more reasonable price than we do. We have seen since at least 2019.
So, yes, shipping costs are rising and customers are spending less on big ticket items as inflation bites their wallets. In addition, CEO Brian Cornell reports that Target finished the first quarter with $ 15.1 billion in inventory, a large part of his bulky excessive items costing the company to store in warehouses. Yet Target is an extraordinarily well-run company whose parking lots are always full of loyal customers and whose aisles are lined with cash-strapped consumer cash-strapped customers as they pass on discretionary purchases. Indeed, more than a quarter of the company’s sales come from household items and hygiene products, an additional 20% come from the grocery store, an additional 20% come from home furniture, while clothes represent 17% additional. Strength lines such as sporting goods, patio furniture and appliances – the types of products consumers are most likely to give up in inflationary or recessionary environments – boosting only 18% of company sales .
The company’s share price can take a long time to return to altitudes with nose bleeding, but investors of purchase and outfit and income can accumulate actions now and take advantage of a regular and growing dividend during that they are waiting for.
What brings us to …
The yield: At current prices, the Target quarterly dividend of $ 0.90 per share reports almost 2.6 %, one of the best action yields in the past three years:
More importantly, the company announced that it would increase its dividend by 20% to $1.08 per share starting in September. The boost takes Target’s yield ahead to 3.10%, a level it hasn’t reached since August 2019 and, with the exception of the three-year period between November 2016 and August 2019, is the highest return on the stock over the last thirty years:
The payout ratio
At 27.86%, Target’s current payout ratio is well within the company’s historical range. Even with the large dividend hike coming, the payout ratio remains safely within the company’s historical range:
In fact, a payout ratio hovering around 30% remains significantly below Target’s historical norm of around 50%. With less than a kind of cataclysmic event of black swan, the Target dividend is both well covered and likely to continue to climb for the years to come.
There are good figures among bad
But is Target a purchase at this price? Many of my comrades Looking for alpha contributors argue that now is not a good time to buy stocks. Albert Lin and Ian Bezek, among others, make particularly compelling arguments for avoiding Target, and I strongly suggest reading their articles as a counterpoint to my own perspective. That said, I don’t have such a gloomy outlook on Target’s numbers.
It’s true that despite same-store sales growth of 3.4% in the first quarter of 2022, the comps were negative year-over-year when adjusted for inflation. Moreover, compared to the 23% of the first quarter of 2021, the last quarter looks even worse.
But some other figures are encouraging. The company reported revenue of $25.17 billion, a 4.02% year-over-year increase, beating estimates of $688.71 million. Significantly, despite the fierce competition from Amazon (AMZN) and Walmart (WMT), among others, Target has made significant progress in electronic commerce with online sales responsible for $ 13 billion on the increase in $28 billion in Target revenue over the past two years. Importantly, in addition to the company’s growing presence in the online retail space, Target has enjoyed a 4% increase in foot traffic over the past year. Even with the weight of the inflated inventory of Target which weighs on profits, the budgetary forecasts updated from the company guarantee investors that it “continues to expect income growth throughout the year in the low to mid-single digit range, and expects to maintain or gain market share in 2022.”
For investors looking for short to medium-term equity appreciation, I echo the caveats of my colleague Looking for alpha contributors who rate Target a hold or even a sale. I simply do not see the stock take off so early and I would not be surprised if the concerns of stocks, inflation and disturbances of the supply chain continue to drag the growth of the company in the foreseeable future . However, for dividend-growing investors like me, I believe Target represents a wonderful opportunity to secure a secure and growing income stream. While Target’s stock price could certainly continue to decline in the near term, I expect the strong dividend to support the stock as dividend investors step in. If you’re looking for a SWAN with a robust dividend and don’t mind waiting a bit for capital appreciation to pick up again, you won’t find many better companies.