This Discount Retailer Is The Right Choice For Your Retirement Portfolio
Gayatri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Target (NYSE: TGT) is a high quality blue chip dividend growth stock with an impressive track record of consistent earnings growth since its IPO. Over the last 5 years, Target has increased its dividend at a much higher rate than Wal-Mart (NYSE: WMT) and as a result, has recently surpassed Wal-Mart in terms of dividend yield. Target’s current dividend yield of 2.2% not only stands above Wal-Mart’s 2.10% but it is also far above Costco’s (NASDAQ: COST) 1.10%.
Source: Ycharts
In addition, the company expects its annual dividend to reach $3 per share or more by 2017. Thus, I think the company is likely to continue its impressive dividend growth rate and thus, the stock appears to be a good addition to the retirement portfolio as a dividend of $3 implies a yield of 4.7% at current price. In addition to the best dividend yield, Target also has the best margins. The following chart summarizes the data for gross margin, operating margin and profit margin.
|
Company |
Gross Margin |
Operating Margin |
Profit Margin |
|
Wal-Mart |
24.25% |
5.94% |
3.53% |
|
Costco |
11.75% |
2.70% |
1.66% |
|
Target |
30.80% |
7.47% |
4.12% |
Moreover, Target is establishing its footprints in Canada which presents a huge long-term growth opportunity. The stock is also unlikely to disappoint in the near-term as the company has started the third quarter on a good note and has multiple initiatives in place which will drive merchandise sales.
Long-Term Growth Opportunity in Canada
Canada represents a long-term growth opportunity for Target. Wal-Mart Canada is the largest discount retailer in the country, and within a few years, Target should be the next-most-dominant chain. The company is on track to open at least 125 Canadian stores in a rapid expansion taking less than two years. Though expansion in Canada will be dilutive to the EPS this year as well as next year, but with a larger presence the company will start turning a profit over time. With the start-up in Canada set for early next year, I see the earnings outlook improving from flattish to mid-teens EPS CAGR in 2013 through 2016.
3Q off to a good start
In its Q2 conference call, the management indicated that the early Back-to-School results have been positive and August is tracking to management's 3Q SSS plan of ~3%. Looking ahead to 4Q, I think Target’s partnership with Neiman Marcus will prove to be a nice incremental traffic driver over the holidays. I think, the company’s consistent sales growth under a tough macroeconomic environment is impressive and will eventually be reflected in its valuation.
New initiatives will drive merchandise sales
Target is making a concerted effort to elevate the in-store shopping experience to drive average-transaction size, complementing P-Fresh and 5% Rewards. Target’s very solid year to date sales growth is a clear validation of key merchandising and operational initiatives, including P-Fresh and 5% Rewards, and I think the company is striking just the right balance with efforts to drive incremental traffic while preserving or enhancing profitability.
Target is testing Geek Squad's installation and repair services at 29 Target stores (mostly in the Denver Area) which could strengthen Target in consumer electronics. Moreover, in order to ramp up and support its existing beauty offerings, Target has launched a "beauty concierge" test program in 28 stores around the Chicago area. I think these initiatives are opportunities to deliver improved customer service and improve sales trends in these merchandise areas, and signals that the company is focused to work on innovative retail ideas in the discount channel. While only tests at this point, if successful they may offer a good opportunity to roll out to more stores.
The stock is trading at a forward PE of 13.2 which seems unjustified for a company expected to grow at over 12% annually over the next 5 years. I think the market is under appreciating the company’s various initiatives and international expansion plans. Investors seem to be focused on the bumps in the road without taking into account where the road leads and the benefits waiting upon arrival. I recommend buying this stock.
GayatriSharma has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
