It won't deliver the excitement of an investment in a tiny tech stock or cryptocurrency, but Target (TGT -2.89%) might be just the thing your portfolio needs to supercharge returns over the long term. The retailer is primed for a new level of faster, more profitable growth following a record 2020. It is flush with cash thanks to that pandemic-related demand surge, and management has several attractive initiatives it can fund with those resources -- including higher cash returns to shareholders.
With that positive backdrop in mind, let's look at a few ways in which a Target investment could bolster your retirement portfolio over the next few decades.
Most national retailers, including Kroger, Walmart (WMT -0.87%), and Costco, achieved strong sales growth during the COVID-19 pandemic. But Target's success stood out even among these surging peers.
The company added $15 billion to its sales base last year, equating to a 20% increase. That spike came from the combination of a 145% boost in the digital channel and a 7% uptick in comparable-store sales. It also involved significant market-share gains.
CEO Brian Cornell and his team estimate that a full $9 billion of its added sales in 2020 came at the expense of rival retailers. In early March, management credited "the strength of our unique, multi-category assortment" with helping Target grow sales last year by more than it had in the previous 11 years combined.
More than just growth
Target's profitability trends are just as impressive. Operating income jumped to 7% of sales in 2020 compared to 6% a year earlier. Sure, some of that increase can be pegged to the unusually high sales surge. But much of the expansion came from the popularity of Target's ultrafast fulfillment offerings like same-day delivery. Its wider assortment of consumer discretionary products like home furnishings, meanwhile, allowed it to capture higher prices as people sought to splurge in certain categories.
That success helped annual operating cash flow jump to over $10 billion last year, which was easily enough to cover a rising dividend payment, spending on stock buybacks, and robust investments into long-term growth projects like store remodels and the e-commerce platform. Investors can look forward to a steady stream of rising cash returns from this Dividend Aristocrat, which should amplify long-term returns.
Price and value
The main drawback to Target's stock today is its high price. Shares have more than doubled since last April. Costco, Walmart, and Kroger each underperformed the market by a wide margin during that time period.
You can see more evidence of Target's premium valuation in its price-to-sales ratio, which is currently sitting over 1.1. That's well above what you'd pay for Walmart, and even beats the valuation on Costco, a Wall Street darling. Investors are clearly expecting big things from Target over the next few years, and they've pushed the stock price up to reflect those high hopes.
But while its elevated price might take it off the "no-brainer" stock buy list, you might still want to put some Target shares in your portfolio. The shift toward multichannel shopping appears poised to play out over many more years, and this company has demonstrated how it can win more of that growth while raising its profit margins. Don't let Target's share-price rally keep you away from that attractive business. You might look back in a few years and be glad you paid a premium for the high-performing stock.