Growing Dividend Makes Target Corporation (TGT) Attractive
Target Corporation (NYSE:TGT) stock has been downgraded to underweight by Barclays recently from Overweight rating triggering concerns on the share price movement. However, there are some sections that believe that the company’s digital and brick and mortar outlook is solid. The company has also been involved in making big investments towards technology, as well as, supply chain to support its growth ambitions. The retail sector might face some rough weather in physical traffic. However, the e-commerce sales will not likely have any problem. Aside from that, it has a dividend history of boosting it for 44 years. That makes it still more interesting stock to own it.
Not Much Impact
Though any upgrade or downgrade will have its impact on the stock market, Barclay’s downgrading of Target Corporation (NYSE:TGT) shares had little impact. The brokerage reduced its price target to $70 from $90, and yet there appears to be no big scale selling. Also, there was not much change in short ratio after the rating downgrade comments. In fact, shares were held nearly at the same level since Barclays indicated its decision towards the end of the last month. That might be due to the fact that its shares provided a decent yield and more than four decades of continuous growth in dividend has probably held back the investors.
According to Barclays, Target Corporation (NYSE:TGT) stock rating was slashed since the company is predicted to perform below the industry average or sector. That included the overall market also. Also, its analyst Matthew McClintock expressed his concern on the comparable store sales’ long-term growth of 3%. The analyst thinks that the retailer was highly optimistic as a result of weak sales estimations from e-commerce pressures and also lower estimations for expansion of margin. The reasoning for downgrade appears to have not satisfied investors going by the reaction in the market. The company’s earnings failed to meet expectations only once in the last four quarters.
Needs More Focus On E-Commerce
In any case, Target Corporation (NYSE:TGT) needs to focus more on e-commerce as it failed to meet its targets earlier. For instance, the retailer had an ambitious digital growth target of 40% for the year 2015. However, it could achieve a growth of 31% only and it turned out to be a costly miss too. Also, it was one of the reasons that its earnings missed in the fourth quarter. There is no doubt that online sales would be a key factor for achieving revenue growth in the next half a decade. The company is investing on it to push its growth level and it remains to be seen whether it will reflect in the upcoming quarters.
During an analyst call, Target Corporation (NYSE:TGT) indicated that it would spend $1.8 billion in the current year on technology and supply chain and boost it to $2.5 billion next year. The company’s free cash flow improved to $4.41 billion at the end of the last year from $2.65 billion in the preceding year. Therefore, that should be more than sufficient to meet these investments.
Continuous Dividend Growth
The retailer has been paying a dividend since 1965 and boosted the dividend rate for 44 straight years irrespective of the recession or uncertain economic activities hurting the overall sales. Target Corporation (NYSE:TGT) latest dividend suggested a yield of 2.7%, which was higher than the five-year average dividend yield of 2.4%. Similarly, the company’s payout ratio is 41.0%, which is lower than the five-year average payout ratio of 47.0%. That suggested room for boosting the payout ratio in the upcoming years too.
The retailer’s dividend growth rate for the three-year period was 16.91% while the five-year average growth rate is 19.14%. Target Corporation (NYSE:TGT)’s PE is 15.7 times for the trailing twelve-month period, which is lower than the industry average of 17.5 times. Its forward PE of 14.23 times suggests that the stock has further room for upside rewards.
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