Is Target Stock a Safe Bet?

It’s been tough for any sector to keep up with the market that has been driven largely by big tech. And that is no different for the retail sector SPDR S&P Retail ETF (NYSEARCA:XRT), which has underperformed the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) over the past two years.

But within each sector are standout stocks and among them is the retail giant Target (NYSE:TGT) but is it a safe bet now?

Digital Sales Show Promise 

Target was founded as a discount retail store chain in the early 1960s but it has evolved into a store that offers stylish, on-trend merchandise at affordable prices. So what does the future hold? 

The unusual 2020-21 era was a high point for Target, which reported unusually high sales due to its investment in digital commerce capabilities in the prior years.

While physical stores were closed or had limited hours, consumers turned to online shopping for essential items and household goods. As a result, Target’s sales grew by 19.8% in fiscal 2020 (the company’s fiscal years end in late January or early February) to $92.40 billion.

Two more consecutive years of growth followed although the year-over-year sales growth rates declined. In fiscal 2023, bumps in the road appeared when annual sales fell by 1.7% from the prior year to $105.80 billion. Yearly comparable sales performance also came in at a negative 3.7%.

But the bottom line trajectory was different. After the sharp drop, Target’s net earnings grew once again in FY2023. A significant jump occurred in the operating margin from 3.5% to 5.3% between the two years.

Management cited the sales decline as a pullback from spending on discretionary items. This trend started in 2022 and has persisted, weighing down sales.

The company took steps to avoid high inventory costs by aligning inventory with sales trends. These efforts, as well as supply chain improvements, led to a decrease in inventory levels, bringing down costs and boosting profits.

With those positives in the rearview mirror, a lingering concern now is that higher shrinking in inventory will weigh on upcoming quarterly results.

Sadly for shareholders, sales declines have persisted with Q1 figures down 3.2% to $24.14 billion versus the year prior.

Although digital sales showed advances, Target’s comparable sales declined by 3.7%, as the gains were offset by a 4.8% comparable store sales decline and the concern that has arisen in the eyes of investors is that the company remains heavily dependent on its brick-and-mortar stores, which are lower margin.

If were to sum it all up and come up with a conclusion, what does it all boil down to as far those seeking income consistently are concerned?

Are Target’s Dividend Payments Reliable?

Target has a long history of dividend payments and growing them too. In June, Target declared a quarterly dividend of $1.12 per common share, enacting a 1.8% increase from the prior dividend, payable to shareholders in September.

The Q3 dividend will be the company’s 228th consecutive dividend paid, while this year is set to be the 53rd consecutive year in which Target has increased its annual dividend.

Although the Board of Directors did not execute any stock repurchases during the first fiscal quarter, it returned significant cash through dividend payments. The company paid dividends of $508 million in the quarter, compared with $497 million last year, which shows a 1.9% increase in the dividend per share.

Target’s current quarterly rate enumerates to an annual payout of $4.48, yielding 2.95% at prevailing prices. The company has a stable payout ratio of 49.16%, which further engenders confidence in income-oriented investors.

Another tailwind for the company is a major deal with Shopify.

Partnership with Shopify

Target has partnered with e-commerce platform Shopify (NYSE:SHOP) to boost its third-party marketplace.

In this arrangement, Shopify enables Target to discover popular items and make them available to the company’s customers.

Essentially, companies that work with Shopify can now apply to join Target Plus, the retailer’s third-party marketplace.

Expansion in the company’s online portfolio can translate to higher store sales. At least, that’s what Target hopes to achieve to help curb financial declines, especially in its comparable store sales.

Is Target Stock a Safe Bet Now?

Target has raised its dividend for 53 consecutive years and is about a safe a stock bet as the retail sector offers.

With a yield of 2.83% and a payout ratio under 50%, Target has a sufficient payout to attract income-oriented investors who like stability and don’t want the concern that the dividend will be cut anytime soon.

Relative to near-term earnings growth, Target also appears to be trading at a low multiple to earnings. With a P/E ratio of 16x, it’s not particularly expensive as it stands but with 6.4% net income growth projected over the next 5 years, it may be an even better deal than it appears at face value.

Add to that the improving sentiment with 16 analysts revising estimates higher for the upcoming quarter and a price target of $176 per share, and there is a lot to like about Target right now.

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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.