I can always tell when the economy is getting a little ahead of itself. Especially when people tell me to buy Target (NYSE:TGT) for capital gains …
Now, there’s nothing wrong with Target. I shop there (have you tried the cheese balls?) But the five-year annualized return on its stock, 6.4%, is nearly half that of the average discount stores stock, which rates at 10.21%.
That is not the kind of half-off sale I like.
Target’s record is better than that of most retailers, though. For one, it’s not going out of business. Secondly, it can compete with Amazon (NASDAQ:AMZN) because driving to the store is still faster than ordering and waiting.
But what kind of investment is Target stock?
The Bull Case for Target Stock
Target’s fourth-quarter and full-year earnings did make a bullish case for the stock. Sales were up 5.3% year-over-year, online sales were up 31%, and earnings of $799 million, $1.53 per share, on revenue of almost $23 billion beat the official estimate of $1.52 per share of earnings. But they didn’t beat the hoped-for “whisper number” of $1.55 per share on $23.15 billion in revenue. This is Target we’re talking about …
By that, I mean that Target, like the Minnesota sports teams on whose stadia it splashes its name, does not get ahead of its skis. The stock’s 2019 performance is roughly in line with that of the S&P 500 average.
What’s most attractive about Target is its dividend, which at 64 cents per share yields a respectable 3.52%. The dividend is up from 43 cents per share five years ago, and the company said it returned $3.4 billion to shareholders, between dividends and buybacks, during the last year.
That means if you picked up some Target at its Christmas low of under $62 per share, you got a nice yield to stick under the tree, a real bargain. But can it really be worth $75, which is where it opened after analysts digested those great results?
The fourth-quarter earnings beat was its first in a year, and the gain only brings it back to where it was before it missed on its last quarter. CEO Brian Cornell promised to invest $7 billion into the stores when he took over two years ago and says those investments are now paying off.
Some of that went into making the stores look better, but more of that went into logistics and in launching dozens of new private label products, so its generic merchandise looks worth buying. Target can now offer same-day delivery of products with a $99 yearly subscription to its Shipt service, with next-day delivery of even bulky items for just $2.99.
It offers in-store pick-up of orders, or curbside delivery, with the aim of making it “America’s easiest place to shop.” To differentiate itself from Walmart (NYSE:WMT), which has re-committed to the large store format, Target is putting small-format stores into major cities, near college campuses, and at upscale tourist sites like Cape Cod.
Bottom Line on Target Stock
Target has been catching up under Cornell, but now that it has caught up, is it really a better investment than the companies it is emulating, Amazon, Walmart and Costco Wholesale (NASDAQ:COST)?
The two-year return is surprisingly close to that of the stores, although Target will never be a tech company. If you live in Minneapolis, Target is the home team, and Cornell has it playing well.
But if you see retirement as imminent and need some fast returns, Target is not going to win the pennant for you. Target offers a competitive yield. When the excitement over earnings dies down so will the stock, making it worth a long-term investor’s attention.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN.