Target (TGT 0.14%) has an impressive history of dividend payments. Indeed, 50 years of paying a steadily growing dividend qualify it as a Dividend King. And more recently, Target shareholders have benefited from some unintended consequences of the coronavirus pandemic.
Sales and profits have surged as Target was deemed an essential retailer and allowed to stay open while non-essential businesses were forced to close. What follows is a closer look at Target's business prospects and its ability to sustain the excellent streak of dividend growth.
Target is growing sales and earnings and has room to keep raising dividends paid
Note, dividends are paid out of earnings. If a company pays more in dividends than it generates in net income, it is probably doing so by either dipping into savings or, even worse, taking on debt to pay dividends. There are some exceptions for businesses losing money on the bottom line but still generating positive free cash flow. Some expenses like depreciation are non-cash expenses, and so it can reduce income but not cash. Still, the only long-term sustainable method of paying dividends is from profits.
In that regard, Target is doing an excellent job. Earnings per share (EPS) have increased from $4.28 in 2012 to $8.64 in 2021.That's a compounded annual growth rate of 8%. Target can decide how much to pay out in dividends and reinvest in the business for future growth. Over the last decade, Target has decided to pay out less than half of its earnings as dividends. Its dividend payout ratio was 31% in its most recent year.
That means Target has plenty of wiggle room to sustain or increase its dividend over the next several years. At a 31% payout ratio, earnings could decrease, and Target could still increase its dividend without paying more in dividends than it generated in profits. Target's most recent quarterly dividend was for $0.90 per share. That's $3.60 annualized, which is below even the EPS from 2012 of $4.28.
Fortunately for Target shareholders, the money that management is reinvesting into growth shows excellent results. Specifically, Target has created an omnichannel shopping experience that customers are gravitating toward over the last few years. Shoppers can buy online and have their orders fulfilled by several different methods. A common theme among the most commonly chosen fulfillment options is a preference for same-day retrieval. Target's same-day services drove over half of all digital sales in the last two years -- that's over $6 billion in revenue.
Overall, sales have grown from $70 billion to $84 billion from 2012 to 2021. In that same time, operating income rose to $6.5 billion from $5.3 billion.
Is Target a dividend stock to buy for 2022?
Target is steadily growing sales and earnings per share. Its investments in same-day delivery services are well-liked by consumers, giving it a vote of confidence by choosing the option on billions in sales. Target is likely to generate enough earnings from its operations to pay a growing dividend sustainably.
What's more, Target is trading at a price-to-earnings ratio of 17, which is near the lowest it has sold for in the last 12 months. All the signs point to Target being an excellent dividend stock for 2022.