Both companies are seen as stable, reliable and resistant to inflation, and each offers to investors dividend payments that have risen steadily for around a half century. But which of the two retail giants is better to own?
Target Just Popped After Choppy Period
Target is currently regaining ground again after a prolonged and challenging period.
The company reported GAAP earnings of $2.10 per share in Q3, a 36% improvement compared to the year-ago quarter.
Total sales contracted by 4.3%, driven largely by lower consumer spending in discretionary categories.
Even with this headwind accounted for, the company expects to earn between $1.90 and $2.60 per share in Q4.
One of the strongest arguments in Target’s favor is on valuation. Target shares trade at 15.8x forward earnings, 1.1x expected earnings growth and 11.0x cash flow.
While the company does carry a somewhat concerning debt-to-equity ratio of 1.2, the overall financial picture suggests that the stock is still trading below its fair value.
Analysts expect Target shares to rise by nearly 15% to a median target price of $151 over the coming 12 months.
The stock could also offer strong long-term returns, as Target’s earnings are projected to rise at a compounded rate of about 13% over the next 3-5 years.
In addition, Target offers a combination of dividend yield and growth that income-focused investors may find attractive. With an annual payout of $4.40, Target shares yield 3.4%.
Over the past three years, this payout has grown at a compounded rate of over 15%, demonstrating management’s commitment to passing on excess earnings to shareholders.
The company has also raised dividends for 52 consecutive years, making it one of the S&P 500’s few dividend kings.
Counterbalancing the valuation and dividend income arguments is disappointing earnings, which are still well below the levels they reached in 2020 and 2021.
While the company seems to be mounting a solid recovery and returning to positive earnings growth, lower discretionary spending could continue to put pressure on overall revenues.
Target’s debt load has also increased by more than 10% over the past year, potentially creating economic headwinds as the company navigates today’s higher interest rate macro environment.
Like Target, the path for Walmart hasn’t been all smooth sailing. In Q3, the company’s total revenues rose by 5.2% year-over-year to $160.8 billion.
Adjusted earnings were $1.53 per share, though the company earned just $0.17 on a GAAP basis. This was still an impressive result, as Walmart’s GAAP net income in the year-ago quarter was a loss of $0.66 per share.
Walmart also still enjoys a very strong economic moat that protects it from competitive pressures. In the grocery segment, for example, Walmart commands about 25% of the American market.
With a vast retail presence, growing eCommerce clout and nearly universal name recognition, there is little doubt that Sam Walton’s firm will continue to deliver strong performance going forward.
A further positive about Walmart for investors is the company’s reliable long-term revenue growth. In nine of the previous 10 years, Walmart’s global revenues have increased year-over-year.
Given that the top line is still growing modestly even as competitors like Target struggle with slightly lower revenues, there is good reason for investors to believe that management can sustain this trend well into the future.
Walmart’s valuation, however, is not as appealing as Target’s. WMT shares currently trade at 24.2x forward earnings, a much higher premium than Target’s mid-teens PE.
Investors may also be concerned by the stock’s 3.3x price-to-earnings-growth ratio, which strongly suggests that Walmart is overvalued on the basis of its expected growth. Nonetheless, it does outperform Target in terms of its debt-to-equity ratio, though. While Target carries 1.2x its total equity in debt, Walmart’s ratio is a much more comfortable 0.5.
The Waltons family firm may also struggle to appeal to dividend growth investors when compared to Target. Walmart shares yield 1.46%, less than half the current yield of Target. The 3-year dividend growth rate for Walmart has been a tiny 1.9%.
Although Walmart’s payout ratio is lower than Target’s at 38%, management does not appear to be in a hurry to allocate a larger share of the company’s cash flow to dividends at this time.
It’s worth noting, though, that Walmart’s 50-year history of dividend hikes makes it very likely that management will continue to reliably and incrementally increase the payout.
On the 5-year horizon, Walmart’s earnings are expected to continue growing at a compounded rate of about 7.4%. While not as high as Target’s expected growth, this will likely be sufficient to support progressively higher share prices.
Over the coming 12 months, analysts expect Walmart shares to reach $181, an increase of almost 16% from the most recent price of $156.
Which Stock Is the Better Buy Right Now?
So between Walmart vs Target stock, which is best? Target offers a higher yield, trades at a lower PE ratio and is more undervalued than Walmart.
Nevertheless, both Target and Walmart appear to be attractive buys at the moment. For investors with a bit more tolerance for risk and volatility, however, Target could provide superior returns.
With higher long-term earnings growth expectations and lower pricing, Target is forecast to deliver respectable returns to value investors willing to ride out the storm as the company recovers. Its shares may also be more appealing to dividend growth investors, given the higher yield and more aggressive recent history of distribution increases.
Investors who are more conservative, however, may still want to take a look at Walmart. The company’s economic moat and consistent earnings growth give the stock the potential to deliver steady, stable returns while also producing a stream of dividend income. While Target may be the better value in today’s market, Walmart remains an attractive retail blue-chip stock.
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.