Company Description: Target Corp. operates nearly 1,800 Target, SuperTarget and CityTarget general merchandise stores across the U.S. and about 125 stores in Canada.
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 only 1.) above. The stock is trading at a 76.7% discount to its calculated fair value of $245.69. 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 (2005-2008, 2006-2009, 2007-2010, 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 47 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 $74,059. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as TGT has. The stock's current yield of 3.32% exceeds the 3.31% estimated 20-year average MMA rate.
Memberships and Peers: TGT is a member of the S&P 500, a Dividend Aristocrat, 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 2.5% yield, Costco Wholesale Corporation (COST) with a 1.2% yield and Family Dollar Stores (FDO) with a 2.1% 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 $311.32 before TGT's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 47 years of consecutive dividend increases. At that price the stock would yield 0.6%.
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 4.4%. This dividend growth rate is well below the 20.0% 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, future returns will likely be lower as the company focuses more assets to its lower-return food business (PFresh). The food business will naturally generate lower margins.
The company's massive data breach has hurt its results as some customers have opted to shop elsewhere. The breach has resulted in a public relations nightmare for the company. In addition, sales at new Canadian stores have been disappointing. TGT recently announced a disappointing first-quarter fiscal 2014 performance and lowered its full-year earnings projection.
TGT's double-digit dividend growth rate since 2005 (21% increase announced on June 11, 2014) has made it a stock to watch. Although it is trading well below my fair value price of $245.30, I am not buying at this time due to an unsustainable free cash flow payout of 174%. For now I will continue to watch from the sidelines as the company sorts out its future.
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]