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Target Corporation (TGT): An Attractively Valued Dividend Champion on Sale

Time to add TGT to your income portfolio today

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Target Corporation (NYSE:TGT) operates general merchandise stores in the United States and Canada. Target is a dividend champion, which has paid dividends since 1965 and raised them every year for 49 years in a row.

Target Corporation (TGT): An Attractively Valued Dividend Champion on SaleThe most recent dividend increase was in June 2016, when the Board of Directors approved a 7.10% increase in the quarterly dividend to 60 cents per share.

The company’s largest competitors include Wal-Mart Stores Inc (NYSE:WMT), Costco Wholesale Corporation (NASDAQ:COST) and Amazon.con, Inc. (NASDAQ:AMZN).

Over the past decade this dividend growth stock has delivered an annualized total return of 1.60% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

More recently, the stock price has been hammered by a decline in earnings expectations. This is why I wanted to take another look at Target.

The company has managed to deliver a 3.60% average increase in annual EPS over the past decade. Target is expected to earn $4.01 per share in 2018 and $5.80 per share in 2019. In comparison, the company earned $4.09 per share for fiscal year 2017.

Between 2005 and 2016, the number of shares outstanding has decreased from 912 million to 582.5 million. The decrease in shares outstanding through consistent share buybacks adds an extra growth kick to earnings per share over time. I do not like the fact that the net income between 2007 and 2017 decreased from $2.787 billion to $2.669 billion.

Target focuses on affluent consumers with its upscale stores. Its customer base is somewhat different than that of competitor Wal-Mart. Many of Target’s customers enjoy shopping there, and are attracted by the appeal of offerings and overall atmosphere within the stores. Target’s stores are generally more appealing than those of Wal-Mart, and are cleaner.

In addition, Target manages to retain shoppers with its RedCard. Shoppers who use the Target Card get a discount, but also tend to spend more than the average purchaser. In addition, the company has been able to drive more traffic with sales of grocery/food items.

What is the competitive advantage of Target?

I believe that the company offers a unique shopping experience that competitors like Wal-Mart do not offer. I also believe that Target looks for a certain type of consumer, who does not like the assortment of goods and the experience that Wal-Mart provides, yet still wants to get a bargain. The company has been able to offer fashion chic items, which draw the specific type of shopper they target.

The company also offers convenient locations for shoppers, who come to Target for its quality merchandise. I believe that shares could deliver a very good return to investors who are willing to weather near-term turbulence at the company.

Growth for Target could be driven by expansion of number of stores in the US, growth in same-store sales, as well as expanding online sales. The company is targeting cost cuts, in order to boost margins. I am more interested in increasing the number of stores, in order to increase penetration in the US.

Relative to the number of Wal-Mart stores in the US, I still believe there could be areas of new store development for Target, as long as this is executed in a smart way of course. Unfortunately, the number of stores has gone nowhere since 2010.

Despite the issues that Target experienced with its Canadian expansion in 2013-2015, I think that the company may have an opportunity to expand internationally. This is a driver which could propel earnings per share forward for the next 20 years. It has to be executed better than the Canadian store fiasco however.

Another driver for future growth could be the CityTarget stores, which are smaller, but provide the option to locate in densely populated areas. Those stores could have better productivity due to higher potential traffic and higher inventory turnover because of that.

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