Target Is an Even Better Buy than Wal-Mart Now

Target (NYSE: TGT  )  recently boosted its dividend payment by 21%, putting its dividend yield at around 3.6%. Meanwhile, its top peer Wal-Mart Stores  (NYSE: WMT  ) offers a yield of around 2.5%. It looks as if Target is signaling that it can overcome the recent credit-breach issues while still rewarding shareholders. Its superior dividend makes Target an enticing income and growth investment.

Streamlining management
In an effort to streamline management and speed up decision-making, CEO John Mulligan has shifted the company's entire top-management team to the 26th floor of the Minneapolis headquarters. He noted that in order to accelerate the transformation of the company, more "leadership" and less "committee" is required. Target has also brought on Brad Maiorino, previously with General Motors, as chief information security officer.

Problems at home and abroad
In the past, Target relied on trendy clothing and housewares, stocking a minimum level of consumables. This meant that many shoppers would go elsewhere to shop for groceries. In contrast, Wal-Mart saw an opportunity in groceries and began offering a larger selection--it now derives around 55% of its revenue from the consumable segment.

Even though Canada is just north of the U.S., Target found out that expanding into the country was not all that easy. Sales in Canada have grown, but the gross margin is less than 19% compared to nearly 30% for Target as a whole. Target also did a nationwide rollout and didn't have the proper supply chain in place to service all its stores.

Top priorities going forward
Target has identified three major priorities for the current year. The first priority is to seek growth in both sales and traffic in the U.S. The company feels that it can do better in the U.S. by improving on the past record of effectively delivering products and services at attractive prices. The second priority is to improve performance in Canada. Target is hoping that its move to become more of a digital company will promote more online sales in Canada and take the strain off its supply chain.

Another priority is regaining the trust of customers, which took a hit due to the data breach. Target is shifting to using industry-leading chip-and-PIN technology from MasterCard and has accelerated the provision of chip-enabled card readers to all the stores to help boost security.

How shares stack up
Target trades for slightly less than $60, but some Wall Street analysts have a price target as high as $72. Wall Street expects Target to grow earnings at an annualized 12% over the next five years. Compare that to analysts' growth rate for Wal-Mart, which is 8%.

Target has managed to grow its dividend an annualized 20% over the last five years, whereas Wal-Mart's has grown 15%. Target has increased its annual dividend payment for 46 straight years compared to Wal-Mart's 39-year streak.

Target's payout ratio is now around 70% based on its trailing-12 month earnings. Using the expected earnings for 2014 puts its payout ratio at 56%. In comparison, the payout ratio for Wal-Mart is around 40%.

Target's average quarterly free cash flow for the past five years has been $648 million. Its current dividend payment is $329 million, which means there still appears to be adequate cash flow for the dividend.

The bottom line
Target is an attractive income and growth opportunity. Its recent dividend boost makes it one of the top-yielding plays in retail, well above top peer Wal-Mart. For investors looking for a solid play in the retail market, Target is worth a closer look.

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