Retail giant Target (NYSE:TGT) has been through an extremely volatile year, bouncing from a 52-week high of $167.40 to a low of just $87.35. On a trailing 12-month basis, the stock is down over 34%, reflecting weakness in revenue and earnings growth alongside other challenges.
Target, however, is one of the S&P 500’s dividend kings, a group of businesses that have consistently raised their dividends for 50 years or more. TGT’s declining prices have also caused its dividend yields to surge, potentially making the shares attractive for long-term dividend investors.
Is Target’s dividend worth buying, or does the risk of further loss outweigh the stock’s income potential?
How High Is Target’s Yield?
TGT shares currently yield 4.8% and pay $4.56 per year. With a payout ratio of only about 50%, Target doesn’t appear to have pushed its dividend into unsustainable territory even after more than half a century of consistent increases.
Target has even been fairly aggressive in raising its dividends in recent years, having averaged a dividend growth rate of over 11% in the last five years.
Target’s Recent Numbers Were Mixed
Target’s most recent earnings report was mixed, with net sales declining from $24.5 billion in the year-ago quarter to $23.8 billion.
Digital sales, however, rose 4.7%, demonstrating Target’s ongoing success as it focuses more on omnichannel sales. EPS rose from $2.03 to $2.27, but it’s important to note that this included a one-time gain of $593 million from a credit card litigation settlement. On an adjusted basis, Target reported EPS of $1.30.
Turning to its balance sheet, Target still has a reserve of cash and cash equivalents that totals $2.9 billion. This reserve, however, is down considerably from the year-ago quarter’s reported total of $3.6 billion.
Target also has $14.3 billion in long-term debt, though this level of debt isn’t particularly unreasonable for a business as large as it is.
Even with Target’s earnings coming in a bit lower than investors might like to see, it’s also useful to keep in mind that the business is still generating respectable returns on both invested capital and equity. Over the trailing 12-month period, Target’s ROIC has been 13.8%, while its ROE has been 28.9%.
Target’s Moat Remains Largely Intact
For investors looking at TGT as a long-term holding for dividend income, management’s ability to sustain and raise the dividend over time is extremely important.
To achieve this, Target will likely need to maintain the competitive edge it has built up over many decades as a mid-priced retail chain.
Fortunately, Target still seems to have a fairly decent moat around its business. About 80% of Americans shop at the chain at least once each year, and some 30 million customers come through Target stores weekly.
Target has also built structural advantages into its business with a portfolio of more than 40 owned brands across product categories.
Like other large retailers, Target uses its exclusive brands to improve margins and increase sales. With such a large portfolio of products and additions being made consistently, Target appears to be in a good position to keep building its private label business in the years to come.
Is Target Undervalued Now?
Another decent argument in favor of buying TGT is the fact that the stock is trading at a very low valuation of just 10.5 times earnings, 0.4 times sales and 12.4 times operating cash flow.
Even at this valuation, though, analysts still don’t see a huge amount of upside in TGT. The average price forecast for the stock right now is $103.23, an increase of just 8.2% from the most recent price of $95.37.
Most analysts see Target as a hold right now, with 25 standing hold ratings and 7 buy ratings. It’s worth noting, though, that TGT doesn’t have any sell ratings at the moment.
Target’s Headwinds
The biggest concern right now? Revenue growth, or rather, the lack of it. After hitting a high in late 2022 and into 2023, sales have edged lower, showing a mild but noticeable downtrend. That said, revenue is still well above where it stood before the 2020-21 era.
One factor weighing on Target’s performance is the shift in consumer mood. With inflation stickily high and worries about job security mounting, shoppers are growing more cautious.
That’s a problem for Target, which caters to the middle of the market. If those customers pull back on their spending, they might head to even cheaper alternatives Walmart being the obvious destination. Until economic confidence picks up, Target is likely to find it tough to turn the tide on sluggish sales.
On top of that, management faces potential pressure from trade-related issues. If tariffs rise or global supply chains get tangled again, costs could go up. And with Target’s profit margins already treading water for the past couple of years, any increase in input costs could further strain the bottom line.
TGT’s Ongoing Buyback Program
A final major factor to keep in mind about Target is its large and ongoing program of returning cash to shareholders through buybacks in addition to its dividends. In Q1 alone, Target bought back 2.2 million of its own shares, deploying $251 million to do so.
Management still has over $8 billion in buyback authorizations, giving it considerable latitude to keep concentrating shareholders’ ownership positions.
Target’s ongoing buybacks could also indirectly support further dividend growth by gradually reducing the number of outstanding shares on which dividends must be paid.
Is TGT Worth Buying for Its Dividend?
At the moment, Target still appears to be a basically solid business that’s going through a bit of a difficult time. While it’s hard to ignore stagnant revenues and earnings altogether, Target still appears to have a strong moat and a program of returning cash to shareholders that could make up for a period of weaker performance.
The fact that the stock trades at a modest price also helps make TGT look more attractive than it otherwise might.
Taking everything into account, Target could still be a good stock to buy and hold for its ability to produce dividend income.
Even with some challenges facing it at the moment, Target remains one of America’s largest retailers and still has several advantages working in its favor.
This is especially true in the case of Target’s growing digital sales and its base of exclusive brands, both of which could help it weather its current problems and set it up for a return to growth in the future.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.