Dividend Aristocrats

Target Stock; a 53 Year Dividend Aristocrat

Target Stock is a member of the prestigious S&P 500 Dividend Aristocrats index having not only paid dividends for 53 consecutive years, but also grown them. Dividend Aristocrats are blue chip stocks that have raised their dividends consistently for at least 25 years, are members of the S&P 500 index and have a minimum market capitalization of $3 billion.

Management last raised its quarterly dividend from $0.64 per share in May 2019 to $0.66 per share in August 2019. This represents a healthy 3.1% growth rate.

In this article, we will review Target’s business operations, latest financial results, dividend growth history, management outlook, valuation and long term performance versus the S&P 500.

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Target was founded in 1902 originally as Good Fellow Dry Goods in Minneapolis, Minnesota. Today, it is the 8th largest retailer in the United States with 1,868 retail stores and 40 distribution centers.

The company sells an assortment of general merchandise in categories including food and beverages, apparel & accessories, furniture, baby care, toys and electronics, school and office supplies, beauty and personal care and music, video and games.

Its stores operate in small formats which involve retail space of less than 50,000 square feet. The company also runs big box stores that average more than 170,000 square feet selling full line of food items including perishables, dry foods, dairy and frozen products.

Target also owns many independent brands and 1/3rd of its sales in 2018 were from company owned brands such as Archer Farms, Cat and Jack, Embark, JoyLab, Pillowfort, Project 62, Spritz, etc.

Revenue Analysis

Target Stock trades on the New York Stock Exchange under the ticker symbol TGT. As of November 2019, the company has a market capitalization of $64.68 billion and pays a 2.07% dividend yield. This is 10 basis points higher than the yield on the S&P 500, at 1.9%.

For fiscal 2018, the company generated $75.356 billion in revenues and earned an operating income of $4.11 billion, implying an operating margin of 5.5%.

Net income was $2.93 billion, implying net profit margin of 3.9%. Sales in 2018 grew 3.6% over 2017 sales of $72.714 billion.

The biggest selling category is beauty and household essentials which made up 24% of sales, followed by food & beverages at 20% and apparel & accessories at 20%. 4th largest category is home furnishings & decor at 19%.

Sales by Category Target Stores

Target has grown revenues at a compounded annual growth rate (CAGR) of 1.1% over the last 5 years. Meanwhile, operating income dropped at a compounded annual growth rate (CAGR) of -3% during this period.

This drop is attributable to increased investment in remodeling of 400 stores, and an additional 600 stores are expected to be remodeled in 2020. Furthermore, management opened 24 small format retail stores in 2018.

The company is also facing increased cost pressures as a result of raising minimum wage to $12 per hour in 2018 and $13 per hour in 2019. Target has made a commitment to raising minimum wage for all US workers to $15 per hour by 2020.

Same store sales grew 5% in 2018, up from 1.3% in 2017. This growth was represented by a higher number of transactions due to store additions, and the average transaction amount grew by 0.1%.

The company has been heavily investing in re-developing existing stores spending $2.699 billion in 2018, up 65% from 2017 when it invested $1.631 billion. Renovations include new flooring, lighting and a re-designed grocery space in large format stores.

Target Stock Capital Expenses

Management is trying to make each department in its large stores feel like a store within a store. As an example, the toys section feels like a mini Toys R Us or the electronics department will feel like a BestBuy.

Growth Outlook

In its 3rd Quarter, 2019 financial results, Target Stock generated total revenues of $18.7 billion, a 4.7% growth year over year.

Comparable sales grew 4.5% reflecting 2.8% same store sales growth and 1.7% increase in sales from digital channels.

Management raised full year 2019 earnings per share guidance from a previous range of $5.9 to $6.20 to $6.27 to $6.47 per share. Investors liked this upbeat morale from the company and Target’s stock shot up 14% in a single day.

Strongest area of growth is in same-day fulfillment services where a customer orders a product online, and picks up at the nearest store thus making stores as fulfillment centers.

Dividend Growth History

Target is a member of the S&P 500 Dividend Aristocrats Index, an elite group of blue chip companies that have paid and increased their dividends every year for at least 25 years.

Target paid its first quarterly dividend in 1967 and since has paid dividends every year without missing a single one.

Over the last 30 years, Target has grown its dividend from $0.09 per share in 1989 to $2.60 in 2019, a stunning 2,890% growth. This represents a compounded annual growth rate of 11.9% over 30 years.

Below is a chart showing the steady uptrend in Target’s dividend growth history.

Target Dividend Growth History

Below is a chart showing Target’s annual dividend growth year over year. Even during the great financial crisis of 2008, Target grew its dividend 15% in 2008, 10% in 2009 and 27% in 2010 which is a very strong showing.

However in recent years, due to rising competition from Amazon, Target is growing its dividend in single digits representing 7.4% in 2016, 5.2% in 2017, 3.3% in 2018 and 3.17% in 2019.

Target Stock Dividend Growth YOY

Measuring the Dividend Payout Ratio

Target is a dividend aristocrat meaning it has raised its dividend consecutively every year for 25 years. How awesome is it to be able to own a share of stock in a retailer where you commonly shop at, especially during the holiday season.

Target has an impressive record of raising its dividends as well as achieving stock price appreciation.

However, it is important for investors to check the dividend payout ratio of each company they own, in order to make sure dividends are paid from incoming free cash flows which are growing and sustainable.

Lets examine the the dividend payout ratio for Target. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment.

In its annual report, Target discloses full year 2018 cash flows from operations at $5.97 billion minus capital expenditures of $3.516 billion. This leaves free cash flow at $2.454 billion.

For fiscal year 2018, Target paid out $1.335 billion in cash dividends. Knowing this information, what is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

Dividend Payout Ratio = $1.335 billion / $2.454 billion

DPR = 54.5%

A dividend payout ratio of 54.5% is very strong and leaves room for future dividend increases.

Performance of Target (TGT) Over the Long Term

Target’s stock has grown from $5 in January 1990 to $127 as of November 2019, representing a stunning 2,540% gain in 29 years. This is a compounded annual growth rate (CAGR) of 11.8%, which is more in line with Target’s dividend growth over this same time period.

Target’s stock price was not immune to the 2008 global financial crisis. It’s stock dropped from as high as $66 in September 2007 to as low as $27 in February 2009, representing a drop of 59% from peak to trough.

Target Stock Chart

Why Has Target (TGT) Outperformed the S&P 500 Index Recently?

Below is a 10 year chart comparing Target’s stock performance to that of the S&P 500 Index. Why the S&P 500? Because it is an index of America’s top blue chip stocks, many of them which pay delicious dividends and grow them every year.

Should an investor own the SPY ETF that tracks the performance of the S&P 500 over the long term, as Warren Buffet advises? Or should they own individual stocks like Target? Well one way to find out is through a price-comparison chart below.

Target’s performance is in the red line while the S&P 500 is in blue. As of November 2019, Target stock is up 254.7% over the last 10 years while the S&P 500 Index has gained 185% during this time period.

We can see from the chart below that Target performed in-line with the S&P 500 or under performed it for much of the last 10 years, except for after September 2019 when the stock started to outperform the S&P 500.

Target Stock vs S&P 500

Executive Summary

Here is what we like and don’t like about Target (TGT) stock.

Likes

  • Consistent dividend payments and growth for over 52 years.
  • A higher dividend yield of 2.08%, versus 1.9% paid by the S&P 500 index.
  • Growing dividends at 6.5% annually.
  • Dividend payout ratio of 54.5% leaving room for future dividend raises.
  • Stores remodeling and same store sales growth of 5% while other retailers are reporting negative same store sales growth.
  • Recession proof business because Target sells every day essential items, not just discretionary goods which experience sales declines during hard times.

Dislikes

  • A valuation premium to the S&P 500. Trades at 19.7 times forward earnings while the S&P 500 trades at 17.6 times.
Market Capitalization $64.36 billion
Dividend Yield 2.08%
Forward PE Ratio 19.7 times earnings
Dividend Growth (5 Year Avg.) 6.5%
Dividend Payout Ratio 54.5%
EPS Growth (5 Year Avg.) 5.27%
2018 Revenues $75.34 billion
Gross Margin 29.3%
Net Margin 3.9%

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