It feels good to step off the sidelines and buy a stock considering the market has been on a tear for the last few months. Slowly and surely, I was stashing cash aside waiting for the right opportunity to strike. On this day, I received a message from Lanny in the morning that was short and to the point. “Target…may be time to buy.” I had just woke up at this time (I was in a timezone two hours behind), but I knew that message meant that something big happened with Target’s stock that caused the price to drop. When I read the text, I didn’t realize it, but Target was falling after their most recent earnings release. The time was right, so let’s see I decided to purchase additional shares of Target this week.
The reason I was able to make a quick decision was because Lanny did a lot of the leg-work for researching and summarizing the current metrics for Target when he published his August stock watch list. In his watch list, he showed that Target passed the three metrics of our stock screener with flying colors (multiple below the market, payout ratio below 60%, and history of increasing their dividend). Because of this research, I didn’t have to spend any time calculating or reviewing these items the morning of the purchase. Plus, Target’s stock price fell sharply the day of my purchase, so I knew that the P/E Ratio Lanny used in his watch list had fallen even further….BOOM. Thanks for doing the legwork for me on this part Lanny.
So I already knew that Target was a fit for my portfolio, but before I made the purchase, I wanted to dive into the press release that caused the stock to drop drastically that day. Ben at Sure Dividend also wrote a great piece comparing Target and Wal-Mart’s recent earnings releases that shared a lot of the same feelings I had about Target at the time of purchase. In fact, I was very happy when I read his piece after I purchased the stock to validate some of my thoughts! Definitely recommend stopping by and reading his article as well. In terms of the press release. There was some good, along with the bad. I’ll start with the negative to get it out-of-the-way. The negative items that jumped out at me the most were the lack of sales growth and the downward revision in forward guidance, which was the main driver in the decrease. Nobody wants to see lower forward guidance, especially as rivals are making moves and showing stronger results in the same operating environment. Further, watching CNBC and reading a few articles, some estimated that the downward revision may have been too generous and not reflective of the full picture. We obviously can’t confirm that sentiment/theory until the actual results trickle in.
Now, on to the positive. Man did the company announce an impressive share buyback during the quarter. From the earnings release, Target ended up “Repurchasing 19.0 million shares of common stock at an average price of $70.91, for a total investment of $1,350 million. We have beaten the point in time and time again, all originating from our article about how share buybacks can provide dividend investors huge benefits through a reduction in shares, increasing EPS, driving down the payout ratio, and so on. 19 million common shares is a pretty impressive figure and even better, the $70.91 average purchase price was within $.10/share of the price that Target’s stock was at as I was reading at the press release. If Target’s management was willing to buy perceived under-valued shares at the current market price, why shouldn’t I? Some of the other positives included an adjusted EPS that was greater than the prior period (the adjustment related to one-time early debt extinguishment costs) and a discussion of a massive cost reduction undertaking. All positives in my book.
So what tipped the scale in favor of the buy despite the negatives in the press release? Lanny’s recent piece about not timing the market served as a perfectly timed reminder that this is a long-term investors game. Target faces its share of short-term headwinds and the company will have some work to do. However, this certainly isn’t he first time Target will face short-term headwinds and it won’t be the last. What I know is that Target has proven to dividend investor’s over time that they will find a way to increase their dividend (45 consecutive years). Further, the company is actively working on ways to drive the company going forward to compete with Wal-Mart and others. Big change in organizations takes some time, and I am willing to wait it out because of their prior track record, returns to shareholders via dividends and share buybacks, and their current metrics showing they are discounted compared to the market. I’m in this for the long haul and I am ready to ride the ship through the head winds as I sail towards financial freedom.
The part you have all been waiting for….the purchase details. This week, I added 30 shares of Target at a price of $70.909 per share. This trade added $72 in annual dividend income to my portfolio. In total, I now own 80 shares of Target producing $192 in forward income annually. The only thing that sucks about the timing of this purchase is that it happened two days after the ex-dividend date. However, if I would have bought pre-ex date, which was before the earnings release, I would not have captured the pullback in price. I think I got the better end of that bargain. One more cool tidbit with this purchase. This is not the first EVER individual stock position I have owned which is greater that $5,000. I cannot wait until I receive my December dividend that will have the full power of the position. This will be a huge help pushing the dividend snowball forward and realizing the power of dividend re-investing.
What are your thoughts on the purchase? Are you considering buying Target? Or are the headwinds too strong for you and pushing you towards a company like Wal-Mart or a different company? Have you ever owned a position over $5,000 before? If so, what company? Looking forward to your comments everyone!
Bert