Struggling Growth Stock Offers Unmissable Discount of 49%
At first glance, Target (TGT 0.47%) might not appear to be a strong buy case. Despite a 2% increase in foot traffic during the holidays, the retail giant managed only a modest 0.3% boost in comparable store sales. With these numbers, it's not surprising the stock has dropped 49% since 2021. However, the steep decline may give investors a chance to jump on board, despite the modest growth.
The Current State of Target
Target is one of the largest retailers in the U.S., operating nearly 2,000 stores across all 50 states. It distinguishes itself by offering a mix of high-quality goods and reasonable prices, often referred to as "upscale discount" shopping. Target's standout features include "stores-in-stores," such as Ulta Beauty, and an omnichannel shopping experience that combines online and in-store options, often offering same-day delivery free for Target Circle 360 loyalty program members.
However, recent challenges have hampered Target's growth, including a sluggish economy and difficulty managing inventory levels. These concerns are understandable for a retailer in an ever-changing industry. But one can't ignore the industry's history - once-leading retailers like Sears and K-Mart have largely disappeared.
A Strong Case for Buying Target Stock
Despite the lackluster growth, Target's valuation, combined with an attractive dividend, suggests it could be a solid buy for value and income investors. Target's stock trades at a modest price-to-earnings (P/E) ratio of approximately 15, significantly lower than its historical average of 19 over the past five years.
Target is also a strong dividend stock. In 2021, it maintained its 53rd consecutive year of annual payout increases, a significant achievement that helps bolster investor confidence. Target's dividend yield currently stands at 3.3%, well above both the S&P 500 average of 1.2% and Target's own five-year average of 2.3%. This combination makes it an attractive option for dividend investors.
Furthermore, Target's robust free cash flow of $2.1 billion for the first nine months of 2021 suggests the company can continue or even increase its dividend payments.
Invest in Target for Its Value and Dividend
In conclusion, although Target's growth may be holding some investors back, its modest valuation and enticing dividend make it an attractive option for value and income investors. Its sluggish economy and inventory challenges are temporary hurdles that investors can view optimistically in light of Target's strong fundamentals and appealing dividend yield.
Additional Insights
Recent economic indicators suggest a strong backdrop for retail stocks like Target. The economy is stable, with a well-performing stock market, and Target's stock is trading at a modest multiple of 14 times its trailing earnings. Discretionary spending may begin to pick up in the future, and despite inflation pressures, inflation is currently under control, providing more predictability for consumers.
Target boasts a strong track record of paying dividends and generating free cash flow, making it a solid long-term investment for income-focused investors.
Sources:
- S&P Capital IQ
- Yahoo Finance
- Thomson Reuters I/B/E/S Estimates
In light of Target's impressive dividend history, having increased payments for 53 consecutive years, value investors might find its current 3.3% dividend yield appealing. Furthermore, investigating finance opportunities, one might find the retail giant's relatively low price-to-earnings ratio of 15 attractive for potential investing in its stock.
