How to Profit Even If Target Stock Continues to Get No Respect

Target stock - How to Profit Even If Target Stock Continues to Get No Respect

Source: Mike Mozart via Flickr (Modified)

Years after investors began to understand that online retail was not going to destroy Target (NYSE:TGT), TGT stock continues to struggle. Target has altered its retail strategy to keep up with peers. As a result, it posted its most impressive comparable sales growth numbers in years. Yet, despite these results, Target stock has gained less traction than other brick-and-mortar retailers.

This has resulted in lower multiples on TGT. However, the equity also offers a key benefit that makes Target a compelling, long-term buy regardless of whether TGT stock can generate more buyer interest.

A Lack of Respect Gives Target Stock a Low PE Ratio

The company’s slogan of “Expect More, Pay Less” could also apply to Target stock.  My InvestorPlace colleagues have outlined persuasive, fundamental-based cases for Target stock. Luke Lango cites the price-to-earnings (PE) ratio and describes the stock as “woefully undervalued.” Will Ashworth calls TGT a “top retail name for 2019.”

However, despite the optimism, TGT stock has struggled to gain respect. It saw a steeper decline in the last few months than the SPDR S&P Retail ETF (NYSEARCA:XRT). XRT trades about 22% below its 52-week high. In comparison, Target stock has fallen by more than 27% from its 2018 high.

The decline has taken its forward PE to 11.7. This multiple comes in well behind that of key competitors. Walmart (NYSE:WMT) trades at 19.7 times forward earnings. Costco (NASDAQ:COST) maintains a 26.2 PE ratio. TGT suffered along with these peers a few years ago, when fears of a “takeover” of retail by e-commerce firms such as Amazon (NASDAQ:AMZN) spooked investors. Most retail stocks recovered. Still, for whatever reason, Target stock saw less of a recovery.

The lack of respect did not come about because of a lack of strategic vision. Mr. Ashworth correctly points out that omnichannel retail has become the tiresome, but accurate, description of the future of Target’s industry. Due to omnichannel, Target reported its best comparable sales growth in 13 years in the second quarter of 2018. During this quarter, comparable sales rose by 6.4%. Though the third quarter increase came in at a more modest 5.3%, digital sales rose by 49%.

Look to Dividend Income on Target Stock

Whether this growth helps Target stockholders remains to be seen. Still, I think investors can capitalize on this lack of respect through one of Target stock’s more essential benefits — its dividend. TGT currently pays an annual dividend of $2.56 per share. Thanks to the depressed multiple on Target stock, the yield now stands at almost 3.9% — nearly double the average dividend yield of the S&P 500. This also comes in well ahead of Walmart’s 2.2% yield and Costco’s 1.1% payout.

Also, its 47 years of annual dividend increases make TGT a “dividend aristocrat”. As such, the value of TGT stock depends heavily on the company maintaining these payout hikes. Hence, barring a decline comparable to the one seen by retailers such as Sears (OTCMKTS:SHLDQ) or JCPenney (NYSE:JCP), these dividend increases will probably continue for years to come. Only five dividend aristocrats, none of which are retailers, offer a higher yield.

Final Thoughts on Target TGT Stock

Target stock may suffer from a respect problem. However, its retail strategy and increasing dividends ensure that investors, like Target customers, can also expect more and pay less.

To be sure, TGT stock has suffered from a lack of respect and a disproportionate decline over the last few years. However, sales growth numbers show that Target has outperformed its peers on comparable sales growth in recent quarters. Also, both its low PE ratio and the elevated, but increasing, dividend payout make Target stock a better buy than the equities of key competitors.

TGT stock may or may not gain the respect it deserves. Still, it should reward long-term stockholders with a generous, increasing source of cash flow for years to come.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


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