Target Corporation: Buy TGT for Its Discount, Hold It for Its Dividend

Target Corporation (TGT) hiked its dividend Wednesday and that serves as a handy reminder that TGT stock looks priced for a better second half of 2016.

TGT Stock: Buy Target for Its Discount, Hold It for Its Dividend

With a few exceptions, retailers across the sector are having a miserable year.

Despite a prolonged period of cheap gas prices, low unemployment and an uptick in wages, department stores, general merchandise stores and apparel stores — among others — are struggling to increase revenue.

Consumers are still consuming, to be sure, it’s just that they’re not spending as much on clothing, footwear, accessories and so on. What’s even more troubling is that even high-end stores are struggling. It used to be that luxury names rode through such periods thanks to their wealthier clientele. But no more.

Against that backdrop, TGT stock is faring poorly. Target is off 6% for the year-to-date, which lags the S&P 500 by nearly 10 percentage points. That hurts. TGT’s  underperformance vs. the U.S. equity benchmark is even worse over the past year.

And yet, the fundamentals aren’t as bad as the price action would suggest. Target beat Wall Street’s profit estimate by a wide margin in the most recent quarter. To be fair, both earnings and revenue declined, while a disappointing outlook did it no favors.

But the market knew that retailers that move lots of apparel were getting smoked, and Target fared better than many of them. J.C. Penney Company Inc (JPC), Nordstrom, Inc. (JWN), Macy’s, Inc. (M) and Kohl’s Corporation (KSS) all posted results that revealed weaknesses in consumer spending. When Target offered some downbeat commentary on the state of retail, it wasn’t news. Theoretically, Target stock had priced all this in before it tumbled.

It’s also important to keep in mind that much of the steep decline in TGT came from its inclusive restroom policy.

Is TGT Overly Beaten Down?

Target has seen no ill effects despite calls for a boycott, and yet shares are down 18% since the April selloff got started. Anytime a stock moves that dramatically when there’s not a big enough surprise to justify it, you have to consider the possibility that the market is overreacting. If anything, shares should probably have rebounded somewhat when it became clear that the boycott didn’t matter.

As a result of all this, the valuation on TGT stock has become rather compelling — especially after factoring in the dividend hike. Indeed, the yield on the dividend is creeping up to elite levels for a large-cap S&P 500 stock.

After raising the dividend by 7.1% to 60 cents from 56 cents, the projected yield on Target stock stands at 3.52%. In the entire S&P 500, only about 15 names with market values greater than TGT sport higher dividend yields.

Add that to implied upside — analysts average price target is $77-and-change over the next year — and the total return comes to more than 15%. That should be a buy in any investor’s book.

At the same time, the forward price-to-earnings multiple has come down to 12. That’s far cheaper than the S&P 500 even though Target has a higher growth forecast.

Stocks in the retail sector will likely be subdued for some time, so there’s no rush to put new money to work in Target stock. However, it might be worth tracking this name through the back-to-school shopping season.

That’s when we’ll have a much better idea if shares are too cheap for a second-half rebound.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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