Target(NYSE: TGT) stock fell after the company reported fourth-quarter and full-year fiscal 2024 results. At the time of this writing, the stock is around its 52-week low and down more than 30% in the last year.
But with 53 years of dividend increases and a yield of 3.8%, Target has an extensive track record of boosting its payout. In fact, its dividend streak makes it one of less than 60 members on the list of Dividend Kings -- companies that have paid and raised their dividends for at least 50 consecutive years.
Here's why the stock's price is beaten down, what the company needs to improve, and why shares have ultimately become too cheap to ignore and are worth buying now.
Image source: Getty Images.
The competition has outmatched Target
Target's growth has stalled in recent years. The company enjoyed a temporary spike in sales during the pandemic but overestimated consumer buying trends.
It mismanaged inventory and failed to differentiate itself from other retailers. Meanwhile, Walmart and Costco Wholesale took market share and achieved record results by conveying value to consumers. Both stocks crushed the S&P 500 last year and soared to all-time highs.
Target's discretionary-product mix makes it vulnerable to pullbacks in spending. Whereas Walmart and Costco can get plenty of customers in the door through value-focused groceries and household staples.
Management tried to attract customers with promotions, especially through its Target Circle rewards program and mobile app. But overall, the results simply weren't good enough.
The following chart shows the correlation between the company's lower margins and its stock price. Also note how revenue has essentially been flat in recent years.
To make matters worse, Target got in the bad habit of providing inaccurate guidance, which led to big swings in the stock price following earnings reports. Risk-averse investors who gravitate toward stocks like Target for dividend income would probably prefer it to be less volatile.
Target is doing some soul-searching
Besides reporting earnings, the company launched a strategic plan to deliver $15 billion in sales growth by 2030. Cornerstones of the plan include improving its supply chain and fulfillment capabilities; expanding the Target Circle rewards program; offering better products that convey value, newness, style, and affordability, and improving its omnichannel offering through in-store experience and online shopping.
On the earnings call, CEO Brian Cornell went into detail on Target's role in consumers' lives and changes the company can make to drive engagement:
Target has always believed that shopping should be more than transactional. It should be an inviting experience that encourages people to stay, browse, discover and buy while making it easy for those looking to quickly get what they want and get on with their day. We remain anchored with the vision of what shopping should be, but we're not beholden to what we've achieved in that vision in the past.
Management discussed new store remodels to spur customer interest, strength in categories like beauty, and record-high sales around Valentine's Day as customers leaned into promotions.
Target needs more time to turn around
Despite the renewed sense of vision, the near-term forecast is bleak. Fiscal 2025 net sales growth is expected to be just 1%, operating margins are expected to increase modestly, and earnings per share (EPS) are forecast to come in at $8.80 to $9.80, compared to $8.86 in fiscal 2024 EPS.
Based on Target's stock price of $116.56 at the time of this writing, that would give the company a price-to-earnings ratio (P/E) of just 13.2 and a forward P/E of 12.5 at the midpoint of guidance. These figures are significantly below Target's historical P/E in the mid to high teens.
Granted, Target arguably deserves a lower-than-historical valuation because the business isn't growing right now. But the valuation is extremely attractive for long-term investors who believe the company can turn things around over the next few years.
Its payout ratio is surprisingly low
As discussed, Target is a Dividend King with more than 50 consecutive years of dividend increases. But the last couple of raises have been less than 2%, meaning that the company is basically making the bare-minimum raise to keep its streak alive. On the earnings call, management said it plans to make a low-single-digit increase later this year.
Given its turnaround, these small raises are probably the right move. Bloating the dividend expense would hinder the company's ability to invest in its strategic plan.
Sometimes, companies with too many years of sluggish growth see their dividend expense grow to be such a large share of total expenses that the payout becomes unaffordable. Or a company will try to support the dividend with debt instead of cash from the business. This has happened to Dividend Kings before, such as 3M, which increased its payout for more than 60 years before cutting it in 2024.
Despite having a 3.8% yield, Target's dividend is surprisingly affordable. With a quarterly payout of $1.12, or $4.48 per year -- and with fiscal 2024 EPS of $8.86 -- the dividend is around half of its earnings, which is a very healthy payout ratio. The low ratio shows that despite the lack of growth in recent years, the company's dividend remains manageable.
A high-conviction buy
Target's dirt cheap valuation and excellent dividend (in terms of track record, yield, and affordability) make it a no-brainer value stock for passive-income investors to buy now.
Target has effectively reset expectations with investors by providing weak fiscal 2025 guidance and a five-year plan to return to growth. In other words, it is telling Wall Street to focus on where the business will be by 2030.
That's bad news for investors looking to make a quick buck on Target stock, but it's music to the ears of patient investors looking to buy and hold stocks over the long term.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends 3M, Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.
