Just in time for Christmas eh? As everyone is performing the mad dash to the stores – we all know who is always there for them… the big red bullseye. For those last minute gift ideas, wrapping paper, clothes and even groceries – Target is there for consumers, and I would have to admit, typically at a higher quality as well. I wanted to perform a stock analysis on the company, as I feel there are a high quality, fundamentally sound entity, where so many of my loved ones and close friends shop there. Time to perform our analysis!
Intro to Target (TGT)
Now, I know Bert just ran down his top 5 companies that are dividend aristocrats that have the lowest debt to equity, well, this one just isn’t on the list, but they do have a current ratio > 1 haha. Also, they make a strong consideration for a top 5 foundation stock in one’s portfolio as well and are considered one of Bert’s 5 “Always Buy” stocks. I love Target, plain and simple. I feel their products from their own brand are of much higher quality than Walmart (WMT) and they give the aura of – “clean”. Further, they have that ambiance feeling of stepping into such a place, with Starbucks (SBUX) brewing almost at each location – the Target by me even has a robust 2 story cafe on the inside – talk about convenience, with an escalator to take your cart up. Further, having the Starbucks (SBUX) shows even more of a case to consider buying that company as well, as I see lines and the Christmas red cups during the shopping experiences at Target. Maybe I am a bit biased here, but I prefer shopping at Target for something quick as opposed to Walmart, it’s that much better of an experience. Also – the countless perks that you get at Target from the cart wheel app, the coupons on their phone, as well as the individuals who own the “red” card and receive 5% off at checkout – not too shabby for their consumers. I wanted to take a look at Target again (my last analysis was June of 2014, or approximately 18 months ago), and to continue my deeper dive into the dividend aristocrats after the Kinder Morgan (KMI) dividend cut. Now that all of the hooplah surrounding the databreach is behind us, let’s get to the real deal number crunching that us Dividend Diplomats love to do using our dividend stock screener.
Target (TGT) Analysis
We will compare Target against 2 competitors – Walmart (WMT) and Costco (COST), using a few of our favorite metrics – price to earnings, 5 year Dividend Growth Rate, 5 year dividend yield, current yield and payout ratio. See results below (I used “TheStreet.com” analyst averages for earnings per share for 2016.
1.) Dividend Yield – Okay TGT, not too shabby. Sitting 2nd place here with a 3.14% ratio, a smidge below Walmart’s. This yield is below my overall weighted average yield, but is still higher than the S&P 500. The yield being > S&P is a checkmark in our book. Also, I’m not looking for a homerun here, WMT though, is pushing the envelope here.
2.) Payout Ratio – Really nice. Right where we like to see it – between that 20 and 60% range, and is getting closer to 50%. However, earnings growth is strong and – I was at Target this weekend, and holy crap – talk about busy. Further, my siblings chose to shop there on black Friday as opposed to Walmart, funny how that happens, eh? I think it checks out here, and the other 2 competitors in this analysis are lower, for sure.
3.) The lovely Dividend Growth Rate – As always, see how critical the DGR is to your portfolio, and Target definitely shines in this category as a clear winner, though Costco has some nice special dividends they spurn out to shareholders. However – I didn’t include those as it’s not a traditional form of dividend. Target, had a monster increase from 2013 to 2014, but slowed quite a bit this year – 7.7% increase, which is much better than what most companies were doing – especially with Walmart – as they’ve had “crummy” increases (please refer to big companies increasing their dividends by small amounts) with only a 1 cent increase per quarter this year. Thank you Target!
4.) 5 Year Dividend Yield on Average – Yes, I do enjoy this metric as well – and considering this – TGT and WMT both succeed indefinitely, with TGT at over 64 basis points from their historical 5 year average, this shows slight undervaluation, eh? Not too shabby.
5.) Price-to-Earnings Ratio (P/E) – Both Target and Walmart are below the S&P average and walmart looking slightly more undervalued than Target at the moment, however, a 15 P/E ratio is very solid, which is the ceiling-area that we like to see for our dividend companies traditionally. The barely 15 P/E ratio shows undervaluation for sure.
Overall, Walmart has definitely strong-er characteristics here (see my previous analysis on them), with a higher yield, lower P/E ratio, lower payout as well – HOWEVER, Target trumps a few items, where as the dividend growth rate is far higher and the brand loyalty is far superior. Such a tough call, the question is to buy more yield now, to suffer later with dismal increases or buy quality now with a better feel for dividend growth going forward? Hmm… seems fairly easy, eh? Could I continue my trend in purchasing dividend aristocrats as I did with ADM recently? Interesting…
Conclusion on Target
I love the company, that’s for sure, it’s a dividend aristocrat with over 40+ years of increasing their dividends, which is amazing. I currently own just a smidge above 50 shares of them, which I bought at $57.15, however, that was a very long time ago and the P/E I believe was higher than what it is now. My conclusion on them is they have great dividend metrics, are down around 5% so far this year, have superior quality to other companies in their niche/category and have the length of being a great dividend aristocrat, showing no signs of slow down. They are strongly being considered on my watch list, I’ll say.
How do you feel about Target? Would you consider them on your watch list as you head into the Holiday season? Do you shop there more or at Walmart? Own that wonderful Red Card? Love to hear your feedback and thoughts, thanks again everyone and talk soon!