Target (TGT -0.70%) and Home Depot (HD -1.77%) are two of the largest and most popular U.S. retail chains. They both experienced massive growth at the beginning of the pandemic and are feeling the pressure of inflation right now.
They have also both been excellent stocks to hold over many years, beating the market over time, and both pay high-yielding dividends. Given so much in common, is there enough to define one as a better stock to buy than the other? Let's see.
Which has higher sales growth?
Although Home Depot has a smaller niche than Target, with its focus on home improvement versus Target's department-store approach, it's a much larger operation. It has 2,322 stores, whereas Target has 1,948, and Home Depot took in $157 billion in 2022 sales compared to Target's $109 billion.
In fiscal 2022 (ended Jan. 28, 2023), Target eked out a 2.8% sales increase, with comparable-store sales up 2.2%, while Home Depot's sales grew 4.1%, with a 3.1% increase in comps in fiscal 2022 (ended Jan. 29).
Dollar amounts aside, check growth rates, which are a better comparison. Also see how a company does over time, which gives a better overall picture of what's happening.
Over the past 10 years, Home Depot increased sales at a higher rate than Target. That's harder to do when you're talking about larger amounts of revenue, making it even more impressive. For example, it's easier to turn $1 into $2 than $100 into $200.
HD revenue (annual) data by YCharts.
Which is more profitable?
Target posted $5.98 in earnings per share (EPS) in 2022, versus $14.10 last year. It's been dealing with too much inventory (and marking down prices to get rid of it) as well as higher overall costs, and together those are squeezing the bottom line.
Home Depot's merchandise is less susceptible to economic trends, since people always need home essentials. It has continued to grow profitability despite the economy, with $16.69 in EPS, compared to $15.53 last year, although it's guiding for a possible decline in 2023.
Again, for a better comparison, look at margins.
HD operating margin (annual) data by YCharts.
Home Depot's operating margin is not only much higher, which means its turning more sales dollars into profits, but it's also much more consistent.
Which pays a better dividend?
Target is a Dividend King, having raised its dividend annually for the past 51 years. It pays $1.08 quarterly at this writing and yields 2.65% at the current price. Home Depot has raised its dividend annually for the past 13 years, and increased much faster. It pays $2.09 quarterly and yields 2.75% at the current price.
HD dividend data by YCharts.
Which stock is the better buy?
I came into this thinking I was going to like Target better. I like its innovative store concepts, such as different owned brands, and these resonate with its customers.
But after this analysis, Home Depot looks more compelling. It has raised its dividend much more and has a higher yield, it's more operationally efficient, and it has increased sales more than Target.
What remains to be seen is how this will continue into the future. Target might have more growth opportunities in new store openings, whereas Home Depot looks closer to saturation. Home Depot is compensating for some of that with the increasing dividend, and I think its growth story is far from over. Home Depot has also been more dependable over time, whereas Target has been more susceptible to challenges under pressure.
I think both of these are top picks for dividend stocks, but if I had to choose one, it would have to be Home Depot.
