Three Justifiable Motives to Invest in This Dividend Behemoth Share, Despite It Approaching its Yearly Low Price Level
Target's stock saw a remarkable surge during the pandemic due to increased consumer spending and online orders. However, the retail giant struggled with oversupply and inflation pressures, causing its share price to plummet from over $260 in 2021 to the $100 range in 2023. Despite this setback, Target started showing signs of improvement in late 2023, leading to a stock recovery in 2024.
However, on November 20, 2024, Target's stock plummeted by 22% after reporting its third-quarter fiscal 2024 results. Despite this setback, Target's stock is currently trading less than 4% above its 52-week low.
Investors have had a rocky ride with Target in recent years due to its unreliable guidance and significant post-earnings swings. However, signs suggest that Target is finally finding its footing. Here are three reasons why Target's stock is a strong dividend play:
1. Target is on the right track
Target's steady revenue and operating margin improvement are a positive sign. The company needs to build on this momentum and reach its pre-pandemic margin range of around 6-7%.
In January 2025, Target reported better-than-expected holiday sales, with total sales increasing by 2.8% compared to 2023. Comparable sales rose 2%, and digital sales increased nearly 9%. Target saw growth in various categories, including apparel, toys, beauty, and fragrance, and had record Black Friday and Cyber Monday sales.
Based on these results, Target updated its fourth-quarter fiscal 2024 guidance, expecting a 1.5% increase in comparable sales and full-year adjusted EPS of $8.30 to $8.90. For context, Target's adjusted 2023 EPS was $8.94, indicating that adjusted earnings are still expected to drop year-over-year.
Target's results appear to have normalized, providing a solid base for further growth.
2. Low expectations
Target's battered stock price indicates that investor expectations are low for fiscal 2025. In fact, Target has dropped 9.5% in the last month, while Walmart, which saw a monster 71.9% gain in 2024, fell nearly 10% after providing weak 2025 guidance.
Consumer spending has remained resilient despite higher interest rates. However, tariffs could lead to higher costs and further pressure consumers. Tariffs pose an unknown threat to retailers like Walmart and Target in 2025, so the best they can do is stay flexible and react accordingly.
Target's digital sales made up 18% of total sales in Q3 2024, up 1,100 basis points from five years ago. Target's focus on value and convenience has helped it differentiate from its competitors. Investors should watch how Target continues to grow its e-commerce business and boost engagement with its Target Circle loyalty program.
3. Value for money
Target's stock is now too cheap to ignore. It has a P/E ratio of just 13.2 and a forward P/E of 13.4, suggesting a slight expected drop in earnings in the near term. Moreover, Target's high dividend yield of 3.6% makes it an attractive passive income play. Both Target and Walmart have maintained a 50-year track record of raising dividends annually, making them Dividend Kings.
A top choice for passive income
Target's valuation is substantially lower than Walmart's, but this disparity is unlikely to hold for long. Target is in proving mode and must meet investor expectations.
Investors often seek out Dividend Kings for their predictable and reliable passive income. However, Target's high volatility in recent years reduces this reliability. Target must navigate ongoing consumer spending and tariff challenges while providing more accurate guidance.
Despite the challenges, Target's low valuation, high dividend yield, and proven track record of raising the payout make it an attractive high-yield value stock.
Sources: [1] Glassdoor, [2] Yahoo Finance, [3] SeekingAlpha, [4] MarketWatch
- To achieve its financial goals, Target needs to increase its revenue and operating margin to reach its pre-pandemic margin range of around 6-7% through effective investing strategies.
- Despite experiencing a significant plummet in its stock price in 2023, Target's earnings in 2024 have shown signs of improvement, with better-than-expected holiday sales and an updated fourth-quarter fiscal 2024 guidance.
- Target's finance department will need to manage potential tariff costs and maintain a focus on value and convenience to continue boosting its e-commerce business and Target Circle loyalty program.
- Investors looking for passive income may find Target's low valuation, high dividend yield, and proven track record of raising dividends attractive, but the company's volatility and need to meet investor expectations may present some challenges.
