Target (TGT 1.99%) has been one of the most significant beneficiaries of the COVID-19 pandemic. Sales are up, and customer traffic is booming. Its performance should not be taken for granted, though. Admittedly, the company got an assist from government-mandated closures of non-essential businesses at the onset, leaving it with fewer competitors. It needed to execute on the advantage and sustain it even as business restrictions were removed.
It's yet another example of Target coming through in the clutch. Target has performed this feat multiple times over its long history and has earned itself a position among Dividend Kings, companies that have paid and increased their dividend for 50 consecutive years. Let's further evaluate if Target is an outstanding dividend stock.
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Target is growing dividends per share
For its fiscal years ended in 2013 to 2022, Target has raised its annual dividends per share from $1.32 to $3.16. That means income investors who bought Target's stock in 2013 are getting nearly triple the dividends they started with initially. More recently, Target raised its quarterly dividend to $0.90 per share. So in the future, investors will earn $3.60 from Target in dividends annually. Target's stock is trading at $222 per share, making its forward dividend yield a respectable but not incredible 1.62%.
More impressive is Target's potential to increase dividends over time. The company has grown earnings per share at a compound annual rate of 12.7% in the last decade, far more rapidly than before. Of course, a company's ability to pay dividends is derived from its earnings power. Without sufficient earnings to support dividends, a company will need to entirely reduce or cancel its dividend.
In addition to earnings growth, Target has plenty of cushion to raise the percentage of earnings it pays in the dividends. The payout ratio -- equal to dividends divided by earnings -- totaled just 22% for Target most recently. So by just keeping earnings constant, Target has plenty of room to grow its dividend sustainably without exhausting savings or borrowing. Like income investors who bought Target stock in 2013, current investors can reasonably expect their dividend payment to increase over time.
Fueling Target's growth over the last couple of years and likely into the next several is its best-in-class omnichannel shopping experience. Target customers have options for how they spend money. They can buy online and have their order delivered to their home in a few days for free. Or they may prefer to buy online and pick up the order in a Target parking lot where an employee will place the order in the trunk of a car. The expanded choices give consumers a reason to stick with Target instead of choosing a competitor.
NYSE: TGT
Key Data Points
A favorable valuation enhances excellent prospects
Target is trading at a price-to-earnings and price-to-free-cash-flow ratio of 16 and 22, respectively. That's well below the equivalent 29 and 36 ratios for Walmart or 45 and 41 numbers for Costco.
Overall, Target has excellent prospects to pay and grow its dividends over several years, it's aligned with consumer shopping habits, and it is trading at a fair value. I would say that makes Target an excellent dividend stock.
