Target Corporation (NYSE:TGT) just made a key acquisition that breathes new life into the retailer. The company is acquiring online grocery delivery company Shipt for $550 million. Having Shipt will allow customers to order items from Target and receive same-day delivery. With the lower valuation and higher dividends of TGT stock, this acquisition may become the catalyst whereby investors can buy the equity and be paid well to wait.
The Shipt acquisition represents a huge step forward in catching Wal-Mart Stores Inc (NYSE:WMT) and Amazon.com, Inc. (NASDAQ:AMZN) in the competition for the retail dollar.
The Birmingham, Alabama-based grocery delivery service currently provides same-day delivery to its customers for a flat fee of $99 per year. When one orders from this service, one of the company’s 20,000 “shoppers” will pick up the items and deliver them directly to the customer.
Target will now own this infrastructure and offer same-day delivery from some of its Target stores. The company expects to have delivery services operational at about half of its stores by next summer and most of its stores in time for Christmas 2018. And the company will also this same kind of service to link retailers and distributors in the same manner. Target also acquired Grand Junction a few months ago for that purpose.
TGT Stock Remains Reasonable
Now that Target will compete with Walmart and Amazon on delivery, this creates yet another reason to look at TGT stock. The equity rose 2.7% on the day it announced the Shipt acquisition. Additionally, the stock has been in recovery mode since July, when it dipped to the $50 per share level. The stock today trades at around $63 per share. Despite these increases, the stock still has a price-earnings ratio of about 13. In comparison, Walmart’s PE ratio stands at nearly 26. And Amazon’s has climbed to nearly 300.
The lower multiple is somewhat understandable. Although Target struggles much less than J C Penney Company Inc (NYSE:JCP) or Sears Holdings Corp (NASDAQ:SHLD), it faces difficult challenges. Even though revenue rose about 1.5% in the last quarterly earnings report, TGT stock growth has been slightly negative over the last five years. Profits have also declined with Target, and analysts forecast the declines will continue until 2020. Walmart analysts expect earnings growth to average in the high single digits for the same period.
Pay Attention to TGT Stock’s Dividend
Still, TGT stock remains a stronger dividend player. Target’s dividend has climbed to a yield of 4%. The company also has a 46-year streak of dividend increases that does not appear endangered. Walmart pays a dividend of around 2.1%, while Amazon doesn’t pay dividends at all.
This makes the dividend one key component of opportunity in TGT. Walmart and Target have been fierce competitors for decades. Though Target has been the much smaller retailer, the store has a more upscale image and attracts a different clientele. Usually, one or the other is up, depending on when one looks. Right now, it happens to be Walmart. If Target can increase its profit growth, it would likely close the gap in PE between the two.
Hence, if you were to buy Target stock now, you would be paid 4% to wait while TGT stock doubles in value to catch WMT stock.
Bottom Line on TGT stock
The Shipt acquisition creates yet another reason to buy TGT stock. Buying Shipt allows Target to give customers same-day delivery, a service both Amazon and Walmart have begun offering.
Moreover, the TGT stock price has been increasing since the summer, rising about 25% since hitting a July low. Despite the recent increase, Target trades at half the PE ratio of Walmart and produces nearly twice the dividend yield. Given Target’s responses to the competitive threat posed by Amazon and Walmart, Target has positioned itself to stay in the game, and likely profit those who invest in TGT stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
