Tuesday, May 20, 2014

Recent Buy - Target (NYSE: TGT)

 


I just bought 10 more shares of Target today in an effort to increase my exposure to the consumer discretionary sector. My purchase of Target today increased my total share count to 20 shares. And more importantly, it provided a $17.20 increase to my annual dividends.  And since I still have 70 free trades with my brokerage account, the purchase did not cost me any commission fees.
At today's purchase price of $56.90, my yield-on-cost was 3.0%.  Target has a current P/E is 18.44, with a forward P/E (1yr) of 14.61. Target has a 5-yr trailing growth of 20% and a LT dividend growth estimate of 12%. Target has paid a dividend to its shareholders since 1967 with 42 years of consecutive increases. That is an increase in all but 5 years!!

POSITIVES
  • Target is the second largest U.S. discount store retailer.
  • Although Target current has 1,793 Target stores in the U.S. and 124 stores in Canada, analysts believe Target still has room to grow. 
  • Analysts forecast Target growth at a 10% average pace over the next 5 years.
  • Target is expected to continue to increase its penetration into grocery and household consumable goods.  Currently, only 35% of its sales. 
  • Current dividend of $1.72 represents a payout ratio of only 43%.
My Opinion:
  • I believe Target has strong competitive position and solid long term growth prospects.
  • I believe Target has a strong loyal customer base.  Personally, I know there are people out there that prefer Target over Walmart simply because of the store experience even though Walmart prices is generally cheaper.
  • I believe the Target REDcard and the 5% reward program is under-appreciated. In the long run, as the program gains acceptance, I think purchases through the REDcard reward program will help lift sales and provide added value to the company.
  • I believe the remodeling of the stores (P-fresh) to provide more food and consumables will help drive up sales for Target.  From my own experience, it is very convenient for customers to do all their shopping in one store.
  • I believe the search for new CEO could provide fresh perspective for shares long term.

NEGATIVES
  • Walmart has a pretty solid hold of the first place position amount discount store retailers.
  • Target has posted lackluster results for past 5-quarters in the US.
  • Expansion into Canada has been a disappointment.
  • Massive data breach prior to Christmas.
  • The stepping down of prior CEO, Greg Steinhafel, could be seen as a negative by some as they only have an interim CEO in CFO, John Mulligan. There could be some disruption in the near term.
  • Target also just fired the president of its Canadian stores.
 My Opinion:
  • I believe most of the bad news is already priced into the stock as the stock has a 52-week high of $73.50 ($16.60 or 22.6% more than my purchase price today).
  • At the current price, given the growth potential surrounding the REDcard reward program, improving sales in Canada, and increase grocery and household consumable goods, Target is attractively priced.
  • Given Target's solid track record for increasing dividends, I believe the dividend outlook is solid.  At worse, dividends should remain the same.

What do you think of TGT here? Do you think it’s fairly valued? 
 

I’ll update my Dividend Stocks Portfolio in a few days when the executed purchase has been finalized.  

Full Disclosure: Long TGT.

Thanks for reading.

18 comments:

  1. I have about 40 shares in my Dividend Investment Portfolio and my pushed my investment club to pick up another 12 shares.

    This company is a juggernaut. I feel like one day 4 or 5 years from now people are going to be smacking themselves saying I could have picked up shares for how much?! Much like I do daily with Ford and Citi after 2008/2009 lol

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    1. Evan - my purchase today was mainly because I also believe in Target's future. I think at the current price, coupled with receiving stable dividends while you wait, we added a nice income and growth stock to our family's portfolio.

      Thanks for stopping by...wishing you continued success in your journey!

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  2. TGT seems to be on everyone's mind these days. I just can't get behind most retailers especially TGT here. I know it has been beaten down recently and they have their issues. I know it has a long dividend history as well. But even at these levels it just seems a little overpriced. TGT's PE is higher than its peers and well over its 5 year average PE. I think I wold have waited for a little more pullback in price before pulling the trigger. Just my 2 cents!

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    1. DivHut - thanks for stopping by and providing your input. I would agree that it is not a steal of a deal, but not sure I agree that it is overpriced. Personally, I think a 3.0% YOC is fair for a solid dividend paying stock with growth potential. Nevertheless, if the price drops further, I wouldn't mind picking up a few more. After all, Target is still less than 4% of my portfolio.

      Thanks again and best wishes in your personal journey!

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  3. I like the buy. 3.0% is a solid entry point. I bought some shares in December and again in January. Target is due for a dividend raise pretty soon. It will be interesting to see what they decide. Walmart didn't raise much and I suspect Target will give a token increase as well.

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    1. MDP - Anytime I can get 3% dividend yield at entry, I am happy. Especially if the company has a solid track record of raising their dividends as Target does. I know there may still be rough waters ahead but long-term I like their outlook.

      Thanks for stopping by, wishing you the best in your journey!

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  4. I like the buy and have been nibbling to lower my basis further. I am not nearly as concerned with a trailing P/E number versus a forward p/e due to growth potential. I like TGT for a lot of the same reasons you listed here. I view all of these negatives as just short-term hurdles that will be overcome in the long-run.

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    1. All About Interest - I agree...I think Target is a good LT hold. I'm not buying with a short time period in mind so the current chatter doesn't mean much to me. If anything, it means more opportunities to lower my basis. :)

      Thanks for your input...wish you the best in your journey!

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  5. I plan to buy some soon too.

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    1. SusanZ - As I have said to other here, I like Target as a LT hold. Given their dividend history and 52-week high price, I have no problem initiating a buy at the current price and collect dividends while I wait for the price to go back up. :)

      Best Wishes!!

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  6. People love Target. They've got all that Walmart has without the terrible reputation and poor public opinion. Probably a good pick.

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    1. Stephanie - Exactly...there are loyal Target customers who won't shop at the competitors store! I know, my wife is one of them. :) I realize that it went down today because of the earning report but I plan to continue averaging down my cost basis at these levels.

      Thanks for stopping by, good luck in your personal journey!

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  7. AFFJ,

    TGT should be a very solid long-term buy for you. Although the trailing TTM P/E looks high, that's because earnings are so depressed on the botched Canadian expansion. However, as they turn things around - which I can't imagine how they don't turn things around up there with their experience and logistics - earnings will rebound, and with it the share price and dividends. :)

    Best wishes!

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    1. DM - thanks for stopping by. Our family are loyal Target customers and believe they can and will turn things around. We see no problems with collecting a 3% dividend while we wait around for the turnaround. Cheers!

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  8. This is awesome information. I love seeing what you are buying and why.

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    1. Hannah - Thanks for stopping by. Glad you liked it. I don't do these for every purchase because of the amount of time it takes but will try to continue doing these as much as I can. Cheers!

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  9. I think they'll be fine in the long run but I do have to admit that it's getting hard to own them. It's been one misstep after another since December 2013 and the CEO stepping down is just one more thing. Still a great company and I'm not doing anything with my shares but I sure would like the bad news to stop coming. The good thing that is that the shares didn't sell off that bad after the CEO announced his resignation so hopefully all of the bad news is priced in.

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    1. Yes...there are a few negatives. Fingers and toes crossed that the bad news has stopped. :) There may still be rough waters ahead as they search for a new CEO but long term I am expecting Target to rebound nicely those of us that stuck around will be rewarded for our patience. Best Wishes!

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