Target is an Online Big Box Juggernaut
Target is a big box store that I am sure many of you visit and shop at frequently. Target in recent years has shifted to a hybrid approach to their business strategy where they not only sell items in person but online. Target is currently down 17% from their all time highs that they had in November of 2021. Target is currently sitting at an attractive 16.71 PE ratio while the average PE ratio for the SP 500 is 26.59. Looking at earnings you would think that TGT is undervalued but let's dive deeper since PE ratios don't tell the whole story of a company and can be deceiving. TGT has beat quarterly earnings for the past 10 quarters which suggests that analysts remain bearish on the company.
Let's go shopping
Since Target launched their same day delivery services in 2017 their EPS has grown from 5.01 to 10.26 current day. Target has also found ways to interact with their shoppers when they introduced Target Red in 2018. Target Red allows shoppers to earn 5% off their Target purchases but the interest rates are 23% on their cards and allows Target to collect data on their shoppers. To be clear TD Bank of USA manages the credit cards and Targets main benefit is the data collection of their customers.
Free Cash Flow:7.88 B
Div Yield (FWD): 1.63%
Annual Payout (FWD): $3.60
Payout Ratio: 27.17%
5 Year Growth Rate: 6.38%
Dividend Growth: 53 Years
Target has a low payout ratio at 27% which gives plenty of room for the company to continue to increase their dividends. With the average yield for the past 4 years being 2.54%.Their last dividend increase was in 2021 when the dividend was increased by an insane 32%. I personally am a dividend growth investor. The growth of Targets dividend has been impressive and wildly slept on by many investors. There is plenty of security with their status as a dividend king (50+ years of dividend payments.) The dividend growth rate gives young investors with long investment horizons an attractive compounding interest, even with the yield sitting at a low 1.63% your yield on cost will grow exponentially if you hold this company for 10-20 years.
Past doesn't make the future a guarantee but it can tell the story of where a company is heading
Here is a retrospective look from Jan 2007 before the housing market crash when the market was on a strong bull run. I picked this time period because it's not a cherry picked low for the company but a high that took over 5 years to make any gains on your investment. A $1,000 investment would have increased to a whopping $4,142 in gains ($5,142 in total) at the time TGT was paying $.14 quarterly in dividends $.56 yearly to now $.90 quarterly $3.60 annually an increase of 642% over a 15 year period averaging a 42% per year dividend increase over the past 15 years.
Back in 2020 when the pandemic first started TGT saw their earnings go to almost 0 where the economy was paused but they have quickly recovered and have little to no current risks. One could possibly argue debt to cash flow is a bit high but they can easily pay it down. They are a growing company so it is to be expected that they leverage their capital to continue to expand. With Covid-19 being a non factor to Targets business there are few threats to this company.
Plop your money here and forget it
My investment thesis of target is it is currently at a discount, if the company was valued at market average it would be priced at $351.11 a 26.5 PE average. With the market being so expensive currently Target offers great value for a consistent/growing company with strong fundamentals. Target should easily be priced around $300-351. I think Target is one of the highest quality companies in the world with many of its shoppers highly dedicated to shopping there. They continue to beat expectations and return growing dividends to their investors sets investors with a company to buy and hold for decades to come. TGT has continued their share buybacks which further increases the capital appreciation to their investors. Combining the dividend growth and share buy backs this company is a long term play. Target has the honey to attract the bees it's only a matter of time for investors to come to their senses about this company.
Disclaimer: I do own shares of Target and this is not financial advice and only making my own investment thesis public for others to read.
I look forward to reading your thoughts on Target