Anyone currently holding Target (TGT) stock can be forgiven for being grumpy over the past year or so. Shares of this blue-chip are down more than 15% in the past year, the company was the focal point of one of the biggest consumer hacks in history, and things got so bad that CEO Gregg Steinhafel was directed toward the exits.
However, for as bad as things have been lately, new money actually would be well-spent in Target.
That’s because amid its many blemishes, TGT stock is one of the best ways to find income in a laughably stingy sector.
Retail Stocks – Pinching Pennies Until the Bitter End
Typically, when you think dividend misers, your head goes straight to tech stocks. And for good reason — when you’re trying to stay ahead of the fastest-moving field in Wall Street, R&D is your lifeblood, so that’s where the cash goes.
However, as many tech stocks have matured, yields have slowly grown in the sector, and many legacy names in the space now make for excellent sources of income.
No, if you really want to call cheapskate shenanigans, you should be calling them on retail.
If you take a look at the nine major sectors as represented by State Street’s (STT) SPDR ETFs you actually find that it’s the Consumer Discretionary SPDR (XLY) — which holds Target stock and other retailers — at the bottom of the dividend pile with a paltry yield of 1.25%.
Of course, that’s not really fair. After all, XLY holds a significant portion of non-retailers like Walt Disney (DIS) and Time Warner (TWX).
To paint a more accurate picture, the SPDR S&P Retail ETF (XRT), which is far more concentrated in traditional retailers, yields just 0.69%.
Which is why, in the world of retail stocks, Target — with its generous 3.4% payout — should be viewed no less than a benevolent god right now.
TGT Stock – Its Pain Really Is Your Gain
There are two ways for a stock’s dividend yield to go up:
- The company increases the amount of money it pays in dividends on a regular basis.
- The stock price goes down. After all, if yield is just dividends divided by share price, and you’re dividing by a smaller share price, well … you’re going to get a bigger number.
TGT stock is the beneficiary of both.
Shares have dwindled by 15% in the past year, exaggerating the effects of a very aggressive dividend growth plan that has seen quarterly payouts jump from 16 cents per share in 2009 to 52 cents currently — a darn impressive 225% improvement.
That said, a good yield doesn’t mean squat if you’re holding a crappy stock. But TGT is far from a crappy stock.
Unlike the smattering of retail stocks with decent dividends in the space such as Bebe Stores (BEBE), Guess (GES) or Staples (SPLS), Target isn’t a retailer wholly beholden to fickle fashion tastes, nor is it in a very specific retailing market that’s going the way of heavy consolidation (and, eventually, the way of the dodo).
TGT is a big, general retailer whose only real comparable rival is Walmart (WMT), and it was performing swimmingly until late last year.
The hardest blow came when a massive data breach undermined consumer trust and set the company back financially. Target has been eating costs related to the breach for several quarters — including $148 million in the most recent period — and that in turn has hindered its ability to buy back shares, one of Wall Street’s favorite pick-me-ups.
But while earnings are taking a beating, consumers seem to be letting bygones be bygones; July comparable-store sales ticked up 1%, and Q2 revenues improved 1.7% year-over-year. Sure, quarterly comps were flat, but if shoppers were still shying away from Target over fears of the breach, you might have expected worse.
Less ballyhooed but still a drag on TGT stock has been Target’s performance in Canada, which began in earnest last year and has been dreadful the whole time. Target Canada racked up $941 million in losses last year, and suffered a comps decline of more than 11% last quarter.
However, fixing those failures has become one of new CEO Brian Cornell’s top priorities, and the fixes — many of which center around issues with stocking and product offerings — are very achievable.
Bottom Line
Even if Target’s two biggest problems aren’t completely behind it, they’re going to be in the rearview mirror soon. Couple that with a pretty fair valuation of about 16 times next year’s earnings, and TGT stock is likely to stay level or improve from here — barring some unseen catastrophe, of course.
Then consider the potential for dividend growth. Target currently pays out 56% of its earnings in dividends, which isn’t spectacularly low, but does leave room for continued payouts. Once profits do pick up again, Target’s quarterly checks should get fatter. Even at half the dividend growth rate of the past five years, you’d be looking at a quarterly payout of 70 cents per share five years from now — good for a yield on cost of 4.6% if you were to buy in at current prices.
Target isn’t exactly sitting pretty right now, but it’s easily one of the best ways to get retail exposure with significant dividend yield. Buy TGT stock at will.
Kyle Woodley is the Deputy Managing Editor of InvestorPlace.com. As of this writing, he was long XRT and considering initiating a position in TGT in the next 48 hours. Follow him on Twitter at @KyleWoodley.
