It says something about the industry that there aren't many retailers that qualify as a Dividend Aristocrats by having boosted annual payouts for at least 25 consecutive years. Competition is fierce, profit margins are thin, and shifting consumer demand trends make it difficult to manage the business for the long term -- let alone to consistently pay higher cash returns to investors.
Given those tough conditions, it's impressive that Target's (NYSE:TGT) dividend growth streak recently entered its 42nd year. But that payout history is just one of a few reasons why this is such an attractive stock for income investors.
Desire and ability
Many companies want to pay a generous dividend to shareholders. And Target makes that desire plain in its annual report, saying, "We maintain a competitive quarterly dividend and seek to grow it annually." Where Target stands out from many retailing peers, though, is its ability to deliver on that promise through a wide range of selling conditions.
Take the recent shift toward multichannel retailing that has required huge cash investments on store upgrades and additional fulfillment infrastructure. Like Walmart (NYSE:WMT), Target has seen its capital spending soar, reaching $3.5 billion in 2018 compared to $1.5 billion in 2016.
Yet Target's dividend payment is more easily covered by its cash generation. At $1.3 billion, the dividend commitment amounted to 32% of operating income in the past year. Walmart's comparable payout ratio is 44%. That gap suggests Target has room to more aggressively boost its dividend over time. Income investors saw this scenario play out in the most recent year, with Target's last hike landing at 3.3% compared to 1.9% for its main rival.
The stock also offers a tantalizing yield today. Despite a 30% increase over the first half of 2019, Target shares pay over 3%, compared to Walmart's 2% and the 1% that Costco pays its investors.
Target's operating momentum puts it near the top of its industry, too. Sales jumped 5% at existing locations last year, powered by a 5% spike in customer traffic. That increase was well ahead of the 3% uptick that Walmart managed in its U.S. locations. The traffic boost matched Costco's gains, too, although the warehouse giant improved sales at a more robust 7% clip.
The positive momentum has continued into 2019, with CEO Brian Cornell and his team celebrating market share growth in "every major category ... both stores and digital" in their latest earnings report.
That success matters to income investors because it points to rising profitability in 2019 and beyond. After declining in each of the last two years, Target is predicting a return to higher operating margins this year. If that happens, the company may find itself even more flush with cash next year after it concludes many of its remodeling efforts. Under that optimistic scenario, income investors would likely benefit from quickly rising dividend payments in addition to healthy stock price appreciation.
Yet even if Target's rebound effort flounders, or if the wider retailing industry begins contracting again, income investors likely won't be disappointed with the cash returns they see from this stock. The company has boosted its quarterly payout through a wide range of selling environments and is almost certain to extend that streak toward the half-century mark in the years to come.