Should Target Corporation's Shares Be Purchased in March 2025?
Target's Stock Slump – A Fluctuating Fortune
Target (TGT) - currently down by a whopping -4.86%, has been a rollercoaster ride for investors for quite some time now. The stock has taken a nosedive since late 2021, standing 55% off its peak today. Meanwhile, the S&P 500 index has soared over 20% since then, making Target's struggles glaringly obvious.
But fear not; Target isn't one of those unprofitable, risky investments. This blue-chip company boasts a powerful brand and a lengthy record of success. Oh, and did we mention it's a Dividend King, sporting an impressive streak of 58 years of consecutive annual dividend increases? Yes, you read that right! Fifty-eight consecutive years! That's not luck; that's a can-do attitude and some thorough business strategy.
So, what gives with Target's dismal performance?
Cracking the Target Enigma
A stock's performance whispers tales of a company's fate. Quickly appraise Target's trajectory over the past few years, and you'd think the company's on the brink of collapse. However, Target's business fundamentals are generally robust. So, why is Target's stock value tumbling so dramatically?
The answer lies in Target's cyclical nature as a retail company.
Consumers categorize spending into two primary buckets: discretionary (treats) and staples (needs). While you always need groceries and necessities like toiletries, you might not always need that fancy new couch or the latest gadget.
Target stocks groceries and household staples, but only accounted for about 40% of merchandise sales last year. Companies like Walmart, however, sell more essential goods, such as groceries, which claimed a considerable 60% of its U.S. store sales last year. In other words, Walmart tends to fare better in times of economic downturns.
The U.S. government distributed stimulus checks during 2020-2021, boosting discretionary spending in the economy. Not everyone who received the stimulus checks needed them, though, and as that money ran dry and inflation squeezed household budgets, discretionary spending slid significantly. Below is a visual representation of Target's revenue growth plummeting following the pandemic:
TGT Operating Revenue (Quarterly YoY Growth) data by YCharts
In summary, Target's business is in a lull, and things might stay that way until discretionary spending rebounds.
Target's Steady Finances
Despite Target's downturn, the company isn't on the verge of bankruptcy. Far from it, in fact.
Beyond the company's rich history of success, its financials are remarkably sturdy. For instance, its dividend yields a healthy 3.9% today, nearing an all-time high. That might seem concerningly high, but Target's dividend payout ratio is only 45% of its cash flow. Beyond that, the company carries a relatively modest debt burden of 1.8 times its EBITDA, has $4.7 billion in cash reserves, and boasts an "A" credit rating. Target's dividend remains secure despite its slow growth.
Target is laboring through a deep slump because the COVID-19 stimulus packages caused a massive surge in spending. There's a good chance that consumers will eventually recover, and so will Target – until then, the stock will shower investors with dividend payments while minimizing potential losses. Keep calm and Target on.
Should Investors Buy Target Now?
While it's true that the stock hasn't hit rock-bottom prices, it's still a viable option to consider, given its growth potential and hefty dividends.
Currently, Target trades at a P/E ratio of just under 13. Analysts forecast annual earnings growth of around 6% over the next three to five years. The resulting PEG ratio (2.1) indicates that Target's valuation is appropriate given its projected growth. Many would argue that the stock was overvalued coming out of the pandemic, and its decline has adjusted the price more suitably.
Of course, the stock could still drop further since it's struggling during this discretionary spending slump. But, the stock could generate solid total returns (dividends + earnings growth) of between 10% and 11% annually over the long term.
So, if a solid investment return between 10% and 11% each year aligns with your investment objectives, Target is a worthwhile option to consider this month.
- Target's stock value, despite the current 4.86% decline, is being held up by its strong financial position, with a dividend yield of 3.9% nearing an all-time high and a dividend payout ratio of only 45% of its cash flow.
- The slump in Target's stock is related to the cyclical nature of the retail industry, as consumers' discretionary spending has faded after the surge caused by the COVID-19 stimulus packages.
- The company's overvaluation was a concern before the decline, but analysts now consider the adjusted price more suitable given its projected growth, with earnings forecast to grow around 6% per year over the next three to five years.
- If an investment return between 10% and 11% annually aligns with your investment objectives, Target could be a worthwhile option to consider this month.