Saturday, December 7, 2013

Recent Buy: TGT


Dec 4, 2013: Bought 40 shares of TGT at $62.90 per share.

Target Corporation (TGT) sells a range of general merchandise and discount food products in nearly 1,800 stores in the United States and 124 stores in Canada. TGT offers both everyday essentials and fashionable, differentiated merchandise at discount prices. TGT operates as a single business segment and has a fully integrated online business, Target.com. Although relatively small to TGT's overall size, sales at Target.com are growing much faster than in-store sales.

TGT is a Dividend Champion with an impressive 46-year streak of dividend increases. It pays quarterly dividend in March, June, September and December. Starting Yield on Cost is 2.73%.

Not accounting for dividends, TGT essentially matched the performance of the S&P 500 over the last 10 years:


TGT's dividend growth over the last 10 years are impressive, especially over the last 5 years. Furthermore, it is quite evident that TGT's earnings more than suffice to cover its dividend payments:


Analysis of TGT


Fair value estimates for TGT range from $48.38 (Graham Number method) to $69.80 (S&P Capital IQ), with a mean of $60.05. TGT trades at a premium of 4.58% to the mean estimate.

The following table provides some key statistics for TGT:

The Chowder Dividend Rule requires that the sum of TGT's dividend yield and its 5-year dividend growth rate exceed 12%. For TGT, the sum is an impressive 22.97%. TGT also passes the following of my selection criteria:
  • Dividend payout ratio is below 65% (41.45%)
  • 7-year weighted average dividend growth rate is at least 7% (21.48%) 
  • Price to Earnings ratio is less than 16 (15.40x trailing and 13.60x forward)
TGT's estimated 5-year total payback is 12.28%not quite exceeding 16% as I would like it to do. Also, TGT's Debt to Equity ratio is 90%,  well above my 50% target.

TGT is a 4-star stock: (*******)

Other ratings for TGT


 Zacks Rating 3 Hold
 S&P Capital IQ's Stock Report (*****) Hold
 MorningStar Rating (*****)
 The Motley Fool's CAPS Rating (*****)
 Thomson Reuters's StockReport+ (5/10) Neutral 


Concluding Remarks


TGT is my third purchase this month to increase the diversification of DivGro. During the year, I've been focussing on expanding the number of holdings in DivGro, favoring buying stocks at a discount of at least 5% to fair value. This naturally resulted in a somewhat skew distribution of holdings over sectors. In fact, until my three December 4 purchases, I've only invested in six our of ten available sectors. Now only two sectors remain uncovered: Consumer Staples and Health Care.

TGT has an efficient, multi-channel marketing strategy and a compelling pricing strategy. By continuing to focus more on consumable items, TGT should boost sales and earnings in a sluggish consumer environment. Similar to biggest rival Wal-Mart Stores, TGT is introducing smaller stores to more effectively tap urban markets. This strategy should boost sales in the long-run.

TGT has been actively managing cash flow, returning a good proportion of its free cash to shareholders through share repurchases and dividend payments. TGT recently sold its credit card portfolio for $5.7 billion and intends to use the proceeds to lower debt and to continue repurchasing shares. It is also attempting to expand its presence in key markets through acquisitions.

Macroeconomic conditions are still unfavorable for discretionary spending. TGT faces stiff competition from discount, department and drug stores, as well as from supermarkets and wholesale clubs. Aggressive price competition to gain market share may negatively impact the company's results.

Given TGT's exceptional track record of dividend increases and its recent accelerating dividend growth, I feel TGT is an excellent addition to DivGro. I realize that I'm paying a little premium here, but I think it is worth the extra diversification. This buy adds a second holding in the Consumer Discretionary sector in my DivGro portfolio.

40 shares of TGT represent $68.80 of expected annual dividend income, which increases DivGro's projected annual dividend income to $2,748.02.

TGT is the 22nd dividend stock purchase for DivGro.

Full Disclosure: Long TGT

4 comments :

  1. Busy month for you. :) I like this one. One that i need to get a few shares of myself. good luck

    ReplyDelete
    Replies
    1. Indeed! I want to diversify more this month, as I haven't been focussing on that aspect of DivGro much. Thanks for stopping by!

      Delete
  2. Nice grab. I think TGT is attractive at these prices.

    ReplyDelete
    Replies
    1. Agreed, especially after the recent dip. I would have preferred to pick it up at about $60, but I'm not sure we'll see TGT trading at that level anytime soon.

      Delete

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