Friday, January 16, 2015

Target (TGT): The Underdog Dividend Champion To Consider On Further Weakness

Target Corporation (TGT) operates general merchandise stores in the United States and Canada. Target is a dividend champion, which has paid dividends since and raised them every year for 47 years in a row.

The most recent dividend increase was in June 2014, when the Board of Directors approved a 20.90% increase in the quarterly dividend to 52 cents/share.

The company’s largest competitors include Wal-Mart (WMT), Costco (COST) and Amazon (AMZN).

Over the past decade this dividend growth stock has delivered an annualized total return of 4.80% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

The company has managed to deliver a 4.40% average increase in annual EPS over the past decade. Target is expected to earn $3.25 per share in 2015 (minus losses on exiting Canada) and $3.88 per share in 2016. In comparison, the company earned $3.07/share in 2013. Earnings per share have been depressed by steep losses in the company’s Canadian division, where expansion has been difficult.

Between 2005 and 2014, the number of shares outstanding has decreased from 912 million to 638 million. The decrease in shares outstanding through consistent share buybacks adds an extra growth kick to earnings per share over time. The annual dividend payment has increased by 19.80% per year over the past decade, which is much higher than the growth in EPS.

Currently, Target is selling for 23.60 times expected current year earnings and 19.80 times next year's earnings and yields 2.70%. So far in 2014, I was slowly building my position in the stock by dollar cost averaging my way. At this stage I am not planning on adding more to Target.

I posted the full analysis on Seeking Alpha in September. The thing that changed is that Target is now exiting Canada. By stopping the bleeding, the company can start generating more income right away. 

Full Disclosure: Long TGT, WMT

Relevant Articles:

How to buy when there is blood on the streets
Why Did I Purchase This Dividend Paying Company For a 3rd Month in a Row?
How to think like a long term dividend investor
Top Dividend Growth Stocks of the past decade

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