Updated on February 7th, 2023 by Aristofanis Papadatos
Every year, we publish a review of each of the Dividend Aristocrats, a group of 68 companies in the S&P 500 Index with 25+ consecutive years of dividend increases. We believe the Dividend Aristocrats are among the best dividend stocks to buy thanks to their long histories of annual dividend increases and their strong business models.
With that in mind, we created a list of all 68 Dividend Aristocrats. You can download your copy of the Dividend Aristocrats list (along with important metrics like dividend yields and price-to-earnings ratios) by clicking on the link below:
Next up on our list of Dividend Aristocrats is Target Corporation (TGT).
Target has a long history of dividend growth. The company has grown its dividend for 54 consecutive years. Target is a Dividend King, an even more exclusive list of companies that have increased dividends for at least 50 consecutive years.
Target has been one of the best performing retail stocks over the last five years thanks to its execution on numerous growth initiatives. The stock has incurred an 18% correction over the last 12 months, primarily due to the impact of 40-year high inflation on the business of the retailer. As Target is likely to recover from the ongoing downturn, it has become attractive from a long-term perspective.
Target is a discount retail giant, with a market capitalization of $80 billion. Today, it operates approximately 1,950 stores in the U.S., as well as an e-commerce business. It has a diverse product lineup, with annual sales of more than $107 billion.
Target stumbled during 2012-2017, primarily due to its failed attempt to expand into Canada. However, the company has implemented many growth initiatives in recent years.
Source: Target infographic
As a result, Target has returned to its long-term growth trajectory in the last five years.
Target also proved resilient to the coronavirus crisis. In fact, the retailer greatly benefited from this crisis, as consumers spent much more time at home and thus they greatly increased their grocery purchases. The positive effect of the pandemic on Target is evident, as the retailer grew its earnings per share by 47% in 2020 and by another 44% in 2021, to a new all-time high.
However, Target is currently facing a major downturn due to the surge of inflation to a 40-year high. Excessive inflation has significantly increased the operating costs of the retailer and thus it exerts great pressure on its already thin margins.
In addition, the surge of inflation has greatly reduced the real purchasing power of consumers and hence it has taken its toll on their spending. Due to the double impact of inflation on the business of Target, the retailer is expected to report a 59% decrease in its earnings per share for 2022.
On the bright side, the Fed has adopted an unprecedented aggressive stance in order to restore inflation to 2%. This policy has already begun to bear fruit, as inflation has moderated every single month since it peaked last summer. When inflation reverts closeR to its long-term average range, Target is likely to recover.
We thus expect the company to grow its earnings per share by about 20% per year on average over the next five years, from only $5.50 in 2022 to $13.69 in 2027. That level of earnings per share will be approximately equal to the earnings per share that the company achieved in 2021.
Target has grown its earnings per share by an impressive 13% per year on average over the last decade. The retailer stagnated during 2012-2017 due to its failed attempt to expand into Canada but it has returned to strong growth mode since 2017 thanks to some growth initiatives.
The biggest reason for this excellent growth is that Target has invested heavily in growing new sales channels, which have paid off. First, Target has invested heavily in e-commerce. The rise in e-commerce initially caught many retail companies, including Target, off-guard. Target has really revamped its online offerings and has seen incredible growth rates.
Source: Target infographic
Target has also rolled out its same-day fulfillment service. Lastly, the company continues redeveloping stores and building smaller stores with much less square footage, in places that cannot provide the necessary space to build a large store. They are located in areas that see high traffic, such as densely-populated large cities and college campuses.
Taken together, these measures have had a significant effect on Target’s growth. As mentioned above, Target saw its earnings collapse last year due to the impact of sky-high inflation on its business. However, as soon as inflation subsides, the company is likely to return towards its record profitability, which was achieved in 2021. We thus expect Target to grow its earnings per share by 20% per year on average off this year’s low comparison base.
The 20% dividend hike of Target in 2022, amid a collapse in earnings, is a testament to the confidence of management in a sustained recovery in the upcoming years.
Competitive Advantages & Recession Performance
Target operates in a difficult industry. Retail is highly competitive and thus it is characterized by razor-thin profit margins. For consumers, retail brands often take a back seat to price and convenience.
This is why Target has invested so heavily in store redevelopment. That has enabled the company to retain its brand strength, even in a fiercely competitive industry. Most importantly, the retailer has massive distribution and scale capabilities, which allow it to keep prices low.
In addition, Target operates in a defensive niche of the retail business. Discount retail tends to hold up relatively well during economic downturns, when consumers typically shift from higher-priced retailers.
Target’s earnings-per-share during the Great Recession are as follows:
- 2007 earnings-per-share of $3.33
- 2008 earnings-per-share of $2.86 (14% decline)
- 2009 earnings-per-share of $3.30 (15% increase)
- 2010 earnings-per-share of $3.88 (17% increase)
- 2011 earnings-per-share of $4.28 (10% increase)
Target proved remarkably resilient during the Great Recession. It posted a 14% decline in 2008 but followed this with three consecutive years of double-digit earnings growth. Target once again performed very well in 2020, a year in which the U.S. economy encountered a fierce recession due to the pandemic. And yet, Target continues to raise its dividend reliably each year, including a 32% hike in 2021 and a 20% raise in 2022.
Valuation & Expected Returns
Target has incurred a 32% correction off its all-time high, which was posted almost a year ago. Based on the current share price of $174, Target has a price-to-earnings ratio of 31.6. Our fair value multiple is 17. If shares were to revert to their average price-to-earnings ratio, then the shareholders of Target stock would see annual returns decrease by 11.7% over the next five years due to valuation.
At the same time, Target is offering a 2.5% dividend yield. Given also expected annual growth of earnings per share of 20%, the stock can offer an 8.4% average annual total return over the next five years. This is a fairly attractive expected return for such a great and recession-proof company.
A breakdown of total returns is as follows:
- 20% earnings growth
- -11.7% multiple reversion
- 2.5% dividend yield
Target has faced some major downturns over the last decade. It failed to expand into Canada and struggled dealing with the rise of e-commerce shopping along with the rest of retail, but the company appears to have returned to sustained growth mode.
The retailer is currently facing another major downturn due to the impact of inflation on its operating costs and on consumer spending. However, the Fed is doing its best to restore inflation to its long-term target and hence inflation is likely to moderate in the upcoming years. When that happens, Target is likely to recover from the ongoing downturn.
Overall, we feel that the current valuation of Target is fairly attractive. We encourage investors to buy shares if they are looking for a high-quality recession-proof company like Target and rate the stock as a “hold”, as the 5-year expected annual total return of the stock (8.4%) is somewhat lower than our 10% threshold of a buy rating.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:
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