Wednesday, March 19, 2014

Why Did I Purchase This Dividend Paying Company For a Third Month in a Row?

I added to my position in Target (TGT) for the third month in a row, using my no cost brokerage Loyal3. Basically, I am evenly spreading my equal dollar purchases in the stock every month throughout 2014, rather than making two or three larger purchases. By now you probably also know that Target is a dividend champion which has managed to increase dividends for 46 years in a row. The company sells for 14.40 - 15.50 times forward earnings for 2014. The forward earnings range is $3.85 - $4.15/share.

Everyone is familiar with issues in Canada and the credit card breaches, so I am not going to keep repeating those. This has made many investors nervous about the company. Many seem to be going to the extreme, and projecting the recent news about the retailer onto the future. This is called recency bias, and is quite common among investors. It could also prove costly to you down the road.

It is very fun to watch the behavior of investors during tumultuous periods. During the declines in stock prices between 2008 and 2009, many investors were forecasting the end of the world. Few took advantage of the cheap prices at which many high quality companies were selling for. Now Target has stumbled, and the weak hands are forecasting the actual demise of the company. When investors become emotional about a topic, they can get greedy or fearful, which leads them to make ridiculous forecasts based on those irrational emotions.

In reality, Target’s operations are doing just fine. The company can still achieve some growth in the US, but international is really the place to go. Management has previously stumbled before on big initiatives, but they have always seemed to learn from them. This is a short-term issue, and years from now, investors would look at 2014 with regret that they failed to capitalize on the weakness in stock prices. I would say that the company will likely achieve its goal of $8/share in earnings by 2018. This is a year later than what was originally planned a couple months ago. If you demand perfect precision in growth, then chances are investing in the stock market is not for you. Of course, it is tough to be a long-term investor, when you get scary headlines every day. Unfortunately, this is what separates winners from losers in the long-term investing game.

Of course, it is quite possible that growth for Target slows down over the next few years. This could lead to a slowdown of dividend growth. However, I am hopeful that management will learn from the Canada expansion, and use those lessons when they decide to expand to other countries as well. In addition, the common sense approach is that credit card breaches have happened before, and will happen again. Either way, this is not something that will kill a retailer. At least it didn't kill T.J. Maxx in 2007.Of course, if they fail to show confidence in the business, and do not increase dividends in 2014, then I would stop adding funds to the stock. If they cut the dividend, I will be out the door a second after the announcement. While I am optimistic for the company, I also know when to cut my losses and move on. In addition, I keep a very diversified portfolio of dividend paying stocks, which mitigates the negative effects of dividend cuts stemming from onebad apple.

Either way, many investors I have been interacting with have given me 100 reasons why Target is a poor investment today. Either way, I do my own analysis, which is why I try not to get influenced by others.

One of the risks to retailers is that a portion of shoppers will convert their spending online. This is already happening to a certain degree, and has produced “winners” like The thing is that online sales growth could be an opportunity to reach out to new and existing customers for the likes of Wal-Mart (WMT) and Target. However, I do not believe that consumers will do all of their retail business online. There are certain categories, where customers are always going to prefer the convenience of going to a retail location, and selecting their items to buy right away. For example, if you want to purchase clothes, you need to try them on. It is much easier to buy a TV or a book online, since you are getting the same level of product experience online or offline. If you bought a book, you know it will “fit” your needs, which is why it won’t matter how you bought it. The only difference is how long are you willing to wait before receiving the book.

The thing is that online shopping has been around for over 17- 18 years now, and it has not eliminated the need for brick and mortar retailers. While having exposure to online and offline channels could only help, I am not so sure that people will be buying everything online in the future. If you think so, then ask yourself why didn’t the mail order catalog result in the obsolescence of the retail store decades ago?

Of course, the major question I ask myself is “ Do I see Target around in 20 years?”. For me the question is yes, and thus I would keep sticking to my plan.

Full Disclosure: Long TGT, WMT

Relevant Articles:

How to think like a long term dividend investor
Do not become a victim of fear in your dividend investing
Emotionless Dividend Investing
Target Corporation (TGT) - A high growth, attractively valued dividend company
Two Dividend Machines I Purchased Last Week

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