Dividend Stock Analysis

Target Dividend Stock Analysis

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Company Overview

Target Logo Target (NYSE: TGT) is an upscale discounter that provides high-quality, on-trend merchandise at discount prices. In addition, Target operates an online business, Target.com.  The company reports under two operating segments: Retail and Credit Card.  Target has 1752 stores in 49 states, including 251 Super Target locations.



EPS, Dividends, FCF

eps graph

Annual Growth RatesEarnings Per ShareDividends Per ShareFCF Per Share
10 year10.07%13.03%N/A
5 year5.05%15.23%46.46%
1 year15.38%8.06%381.93%



EPS growth has been rather erratic, but not nearly as much as free cash flow, which had 4 negative years in the past decade. Dividends have shown consistent growth, albeit at a faster pace than eps.

Expected Earnings

  • 2011 – 3.92
  • 2012 – 4.42

Payout Ratios

payout ratio graph

I normally graph both the earnings based payout ratio in addition to the cash based, but the numerous negative years of fcf made this difficult. This is a great example of why dividend investors must pay as much, if not more, attention to cash based metrics over earnings. If we only looked at the earnings based ratio, TGT has shown a consistent, low payout, leaving plenty of room for growth. But looking at the cash flow, we uncover a major red flag: erratic growth, negative years, and payout ratios ranging from 52% to 12%. This may signal an unsustainable dividend.

Revenue and Margins

YearsRevenue (in millions)
200036,951
200139,826
200243,917
200342,025
200446,839
200552,620
200659,490
200763,367
200864,948
200965,357



Revenue has grown by an average of 6.51% for the past 10 years

margins graph

All margins have remained stable, and are in line with this industry.

Balance Sheet

debt graph

TGT’s debt is a bit higher than I normally like to see. Total Debt to Equity is 0.75, and debt is 42.71% of capital employed.

The interest coverage ratio is 5.83 and the current ratio is 1.63

Returns

returns line graph

Return on equity for the past year was 17.12%, down from a high of 26.55% in 2004. Cash Return on Total Capital has grown significantly in recent years, peaking last year at 15.50%

Stock Price Valuations

current price –55.05
5 year low p/e –12.39
p/e (ttm) –16.68
p/e (forward) –14.04
p/cash flow –10.01
peg –1.1
5 year high dividend yield –1.61%
dividend yield –1.82%

Conclusion

Target has a strong brand name here in the US, and is often seen as a step up from Walmart stores, which can occasionally be disorganized and sloppy, especially in more urban or lower income areas. Their merchandise is mostly of higher quality, but still reasonably priced, and the Target name carries less stigma than the oft hated Walmart. But a major growth hurdle I see for TGT is their lack of international exposure. With operations only in the US, the most saturated market in the world, it may be difficult to produce significant growth over the long term. Walmart has a huge head start in the international markets, and it would be a formidable challenge for Target to catch up.

My analysis reveals some red flags. I don’t like the erratic earnings, and debt is a bit higher than I like to see. But what really concerns me is the inconsistent, and sometimes negative, free cash flow. Since cash is what pays dividends, I prefer a company that regularly produces enough cash to cover a growing dividend. I am not 100% confident Target can accomplish this.

In addition, I think the price is high, trading above it’s 5 year average low p/e. Though it’s yield is higher than it’s 5 year average high yield price, a 1.82% yield is below my entry point.

For comparison, see my analysis of Walmart here

This is the second installment of my January Industry Analysis of Discount, Variety Stores. Next week I will analyze Costco, followed by Family Dollar Stores. Subscribe to my rss feed to get all my updates.

Further Reading

Target Stock Analysis@ Dividends Value

Target Stock Analysis@ Dividend Growth Investor

Target Stock Analysis@ The Div Guy

Target Investor Relations

Full Disclosure: I do not own any TGT. My full portfolio holdings can be seen here

12 Comments

    • Great catch Rhino! I think it’s interesting they are taking over some of the locations and unloading the rest on other retailers, like Walmart. Either way, good sign for Target. I’m interested to see how it all works out.

  1. They just bough 200+ stores from The Bay owners (US private equity firm) to acquire the Zellers stores in Canada. I believe they paid nearly 2B$ and expect to open in 2013/2014. Some of Zellers lease were quite cheap and RioCan, the primary real estate renter for Zellers, is mulling over price increase in some locations as Zellers move out.

    It’s expected to give some good competition to Wal-Mart.

    • I can definitely see Target taking some business away from Walmart. Where I live, and among my age/income group, Target is the preferred store for it’s higher end merchandise and overall more attractive store. I wonder how Canadians will take to it…

  2. I am certain Canadians will take to it, I am a Canadian and I know that there is already a huge brand recognition here. Cross border shoppers love Target. There is really nothing in the “High-end discount” space right now.

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