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Got $1,000? Here Are 3 Reasons to Buy Target Stock

By Adria Cimino - Jan 27, 2021 at 9:30AM

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Shareholders of this retail giant will benefit from these elements right now, and over time.

Target's (TGT -27.43%) share price climbed 38% last year and now sits near an all-time high. That might cause someone to worry about making this retailer their next stock pick. What if all of last year's successes are priced in, and the growth story is over?

But I don't buy that worst-case scenario.

Instead, I think it's likely Target's winning streak will continue over the long term. And that's why, if you have $1,000 (or even less) to spare, now is a great idea to scoop up shares. Here are three reasons to target Target stock for investment.

1. Online sales will grow, with or without the pandemic

At the start of the coronavirus crisis, Target benefited as many shoppers were forced to switch to online retailers to find essential goods. In the quarter ending May 2, Target's digital comparable sales soared 141% year over year. Since then, Target's digital sales have maintained year-over-year triple-digit-percentage growth. Most recently, the company reported a 102% increase in digital comps over the November/December holiday period.

A man holds his credit card and smiles at his computer as he shops online from his living room.

Image source: Getty Images.

Bear investors might argue that all of this growth came in the context of the health crisis, even as daily COVID-19 cases declined for a while over the summer. What will happen once the pandemic is brought under control? Target's digital sales growth may maintain those triple-digit growth rates, but I wouldn't expect a major slowdown, either.

An article on the World Economic Forum website, citing data from IBM's U.S. Retail Index, said the coronavirus crisis has sped up the shift from physical stores to online shopping by five years. Before the 2020 crisis, Target's online sales were already were on the rise as the company had been reporting more than 25% annual growth in digital sales for six straight years.

2. Target knows how to use its stores

Target's stores play a key role in the retailer's business, and I'm not talking about just welcoming shoppers. The company actually fulfills a significant number of its online orders from its stores rather than from warehouses, which leads to significant cost savings.

In the third quarter (which ended Oct. 31), Target said its stores fulfilled more than 95% of the company's online sales. The company managed to maintain that store fulfillment rate even through the Q4 holiday shopping season. At the same time, pickup and drive-up services grew 217%. And that's after triple-digit growth in the previous two quarters. When a customer comes to a store to pick up an online order (rather than Target shipping it from a warehouse), the transaction is 90% cheaper for Target. That's based on the cost per article purchased.

Since online shopping is here to stay, these services, too, are likely to attract more and more shoppers. Considering the cost savings linked to order pickup, this is more good news for Target.

3. Dividends won't disappoint

Target is a Dividend Aristocrat, meaning it has increased its dividend annually for at least 25 straight years. Right now, it pays an annual dividend of $2.72 per share, with a 1.42% yield. And a look at the chart below shows us Target has what it takes to continue lifting its dividend. The company's free cash flow is at its highest level ever. And the cash dividend payout ratio shows the retailer is paying out about 32% of its free cash flow, which is a very sustainable rate.

TGT Free Cash Flow Chart

TGT Free Cash Flow data by YCharts.

Investor takeaway

So, online sales growth, smart use of its stores, and a steady and growing dividend are three solid reasons to invest $1,000 in Target stock. Revenue growth and the cost advantages of store fulfillment should boost earnings. The company's net income has climbed for the past two years, and it's likely the annual earnings report on Feb. 3 will show another gain. That, and the promise of regular dividends, is great news for shareholders.

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