Target Corporation: Reasonably-Valued Dividend Aristocrat

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The company has a prolonged track record of successfully expanding, which has come with exceptional shareholder returns on the way. Target is officially a member of the S&P Dividend Aristocrat Index, which comprises companies counting 25 or more years of consecutive annual dividend increases.

Shares of Target have rallied by more than 60% over the past year. That said, I believe Target has remained reasonably valued. Hence, I am bullish on the stock. (See Target stock charts on TipRanks)

Solid Performace Despite Logistical Challenges

During the course of the pandemic, retailers have experienced logistical struggles, even resulting in empty shelves, in some cases. Despite that, Target managed to report record sales during the past year, with customers appreciating the convenience and premium offerings of its stores.

In Q2 2021, the company generated $25.2 billion in revenues, compared to the same quarter last year ($22.9 billion), implying an increase of 9.5% year-over-year, despite competing against a hard, record Q2-2020. Operating income also increased from $2.3 billion to $2.4 billion during this period, suggesting a 7.2% year-over-year growth. Finally, diluted earnings per share grew 9.0%, from $3.35 to $3.65, year-over-year.

Growth was driven by comparable sales increasing 8.9% in Q2, comprising comparable-store sales growing 8.7% and comparable digital sales growing 10%. These numbers highlight not only Target’s ability to compete in the e-commerce space and gain market share, but also remind investors of the strength of Target’s retail presence in an ever-growing e-commerce space, which is quite impressive in my view.

Target’s Dividend and Valuation

As mentioned, Target has an extended dividend growth record. Speaking of impressive numbers, Target’s latest dividend increase certainly surprised investors when the company boosted the quarterly payouts by 32.4% to $0.90 per share, back in June. Despite such a massive increase (its previous three hikes averaged just over 3%), the stock’s unstoppable rally has caused Target to trade with a nearly all-time low dividend of around 1.5%.

On the one hand, this may suggest that shares are overvalued. On the other, with a forward P/E of 18.8 attached, Target seems reasonably valued. Note that this multiple is on the higher end of the company’s historical valuation.

However, considering its consistent growth and excellent navigation during the pandemic, the safe and growing (likely to accelerate as the latest hike suggested) dividend, and large scale/moat and brand value, the valuation is not blown up, in my view. Suppose Target proceeds to hike its dividend in the double-digit rate going forward, which is entirely possible at the current payout ratio of around 20%. In that case, investors should not be surprised to see the P/E expanding to the low 20s.

Wall Street’s Take

Turning to Wall Street, Target has a Strong Buy consensus rating, based on 14 Buys, four Holds, and zero Sells assigned in the past three months. At $284.29, the average Target price target implies a 17.75% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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