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Will Target Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Target (NYSE: TGT  ) tries to be all things to all retail shoppers. On one hand, its big-box format more closely resembles price-conscious, discount retailer Wal-Mart (NYSE: WMT  ) than upscale department stores. But at the same time, Target has done an excellent job of pulling in exclusive designers to do special collections for its stores, giving it an appeal that its bigger rival arguably doesn't have. Can the retailer keep its savoir-faire in offering both the low prices they need and the fashion-conscious styles they want? Below, we'll revisit how Target does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Target.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $36.7 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 5 years Pass
  Free cash flow growth > 0% in at least four of past five years 2 years Fail
Stock stability Beta < 0.9 0.91 Fail
  Worst loss in past five years no greater than 20% (30%) Fail
Valuation Normalized P/E < 18 13.61 Pass
Dividends Current yield > 2% 2.2% Pass
  5-year dividend growth > 10% 20.1% Pass
  Streak of dividend increases >= 10 years 44 years Pass
  Payout ratio < 75% 25.6% Pass
       
  Total score   7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Target last year, the company has picked up a point as its dividend yield rose above the 2% level. The retailer may not be known for its dividend, but its long track record of treating shareholders right with annual payout increases is especially appealing to retirement-oriented investors.

Target has done an excellent job of threading the needle over the years to come through with cheap-chic products. Through the efforts of executives including Ron Johnson and Michael Francis -- both of which have since moved to JC Penney -- Target was able to give customers great prices and a fun atmosphere.

But retail is undergoing a transformation, and it hasn't been easy for some big-box retailers to compete. Best Buy (NYSE: BBY  ) in particular has had difficulty closing sales with customers, as some shoppers come in only to scout out purchases they actually make through Amazon.com (Nasdaq: AMZN  ) or other online sources. Target, though, has made deals with suppliers in order to avoid the "showroom" effect; its recent partnership with Apple (Nasdaq: AAPL  ) to open small, niche, Apple stores within existing Target stores is just one example of how Target is defending its turf.

For retirees and other conservative investors, Target's healthy and growing dividend is enough to outweigh some concerns about stagnant free cash flow. As long as the retailer can keep adapting faster than its competitors, then Target should remain an attractive stock in a tough industry.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

Add Target to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Amazon.com, Apple, and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com and Apple, as well as creating a bull call spread position in Apple and a diagonal call position in Wal-Mart. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 14, 2012, at 12:00 PM, DazedNotConfused wrote:

    Target won't help anybody retire rich. The CEO & others on top are methodically destroying this company.

  • Report this Comment On May 14, 2012, at 12:15 PM, SPYDERMAN23 wrote:

    Is a 2% dividend yield on a non-growth stock really that appealing to retirees and retirement minded investors? While I like the Company, I can think of better places to invest for yield and growth.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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8/1/2014 9:53 AM
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