Company Description: Target Corp. operates operates about 1,500 Target and 250 SuperTarget general merchandise stores across the U.S.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
TGT is trading at a discount to 1.) and 3.) above. The stock is trading at a 21.2% discount to its calculated fair value of $65.78. TGT earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
TGT earned one Star in this section for 3.) above. TGT earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2002-2005, 2003-2006, 2004-2007, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1965 and has increased its dividend payments for 44 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
TGT earned a Star in this section for its NPV MMA Diff. of the $5,316. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as TGT has. If TGT grows its dividend at 17.4% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 4.1%.
Memberships and Peers: TGT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Wal-Mart Stores Inc. (WMT) with a 2.7% yield, Costco Wholesale Corporation (COST) with a 1.2% yield and Family Dollar Stores (FDO) with a 1.3% yield.
Conclusion: TGT earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks TGT as a 3 Star-Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $114.20 before TGT's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 44 years of consecutive dividend increases. At that price the stock would yield 0.96%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 10.2%. This dividend growth rate is well below the 17.4% used in this analysis, thus providing a significant margin of safety. TGT has a risk rating of 1.75 which classifies it as a Medium risk stock.
TGT has produced fairly consistent earnings and cash flows over the last decade. However, returns on invested capital will likely to decline as the firm transitions a larger portion of assets to its lower-return food business (PFresh). The Canadian market should provide an attractive incremental growth opportunity for the company. Management intends to sell the credit card receivables business.
The company has made remarkable strides since I last did a detailed review in August 2008. It then was rated as a 1-Star company with a low yield of 1.25%. Although it is trading below my fair value price of $65.78, I am not quite ready to buy. Its double-digit dividend growth rate since 2005 has made this company one to watch.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in TGT (0.0% of my Income Portfolio) and was long in WMT. See a list of all my dividend growth holdings here.
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Tags: [TGT] [WMT] [COST] [FDO]
