Friday, June 13, 2008

Target Corporation (TGT) Dividend analysis

Target Corporation operates large-format general merchandise and food discount stores under the brand names of Target' and Super Target' in the United States.

It is a dividend aristocrat as well as a major component of the S&P 500 index. It has been increasing its dividends for the past 40 consecutive years. From 1998 up until 2007 this dividend growth stock has delivered an annual average total return of 12.30 % to its shareholders.

At the same time company has managed to deliver a 16.90% average annual increase in its EPS since 1998.

The ROE has remained in the 16-20% range over the past 10 years with the exception of the 2005 spike above 24%.

Annual dividend payments have increased over the past 10 years by an average of 12.20% annually, which is lower than the growth in EPS. A 12% growth in dividends translates into the dividend payment doubling almost every 6 years. If we look at historical data, going as far back as 1985, TGT has actually managed to double its dividend payment every seven years on average.

If we invested $100,000 in TGT on December 31, 1997 we would have bought 5926 shares (Adjusted for two 2:1 stock splits). In February 1998 your quarterly dividend income would have been $266.67. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $889 by November 2007. For a period of 10 years, your quarterly dividend income has increased by 211 %. If you reinvested it though, your quarterly dividend income would have increased by 234%.

The dividend payout has remained at or below 24% over our study period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that TGT is attractively valued with its low price/earnings multiple of 16 and low DPR. The yield is below my 2% threshold however. I would only consider entering into a position below $32 at current dividend rates.

Disclosure: I do not own shares of TGT
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  1. I am curious. TGT has not traded at $26 in 10 years. Today it is at $53 which is close to the 52 week low.

    If the 2% yield is a qualifier for you then TGT should have been screened out beforehand.

  2. R,

    Actually with the recent increase in dividends, i changed the entry to $32.
    Well, its good to have a company like TGT in my watchlist just in case the stock gets hammered.
    Or what else could happen is that the stock could be flat and the dividend could increase to 2%.
    A third scenario is that the stock falls and the dividend payment is increased.

    An alternative to buying TGT is buying WMT.

    I guess one negative of my strategy is that I won't pick up growing companies that offer small dividend yield but higher than average dividend growth. Anyways, an investment in TGT in 1997 would have more than tripled your money. Yet your yield on cost would be 3.5%-4%.

    I should probably update my model, because my entry criteria is using the same values for a slow dividend grower like ED and for a faster dividend grower like TGT.

  3. nice write-up. WMT should benefit more near-term anyways in terms of sheer stock appreciation due to recessionary environment. "the cheapest of the cheap" in terms of stores.


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