Dividend growth investing is a strategy that has successfully been used by countless investors in the past to achieve financial freedom. By investing in businesses that have rewarded shareholders for decades with rising passive income, it shouldn't be a surprise that such an investing approach can produce impressive results.
Having upped its payout to shareholders for 51 consecutive years, Target (TGT 1.99%) stands above most of its peers as a Dividend King. But should investors still set their sights on the company for their dividend growth portfolios? Let's delve into the retailer's fundamentals and valuation to address this question.
Target will be just fine
With almost 2,000 stores across all 50 U.S. states and the District of Columbia, Target is a highly popular general merchandise retailer. In fact, 75% of the U.S. population is distributed within 10 miles of a Target store. Thanks to its powerful store footprint, Target's $62 billion market capitalization earns it the distinction of being the third-biggest discount retailer behind Walmart and Costco.
The Minneapolis, Minnesota-based retailer recorded $24.9 billion in total sales during the first quarter ended April 29, which was up 0.5% over the year-ago period. Given the current economic environment of still somewhat high inflation, these are arguably satisfactory results. Consumers cut back on discretionary spending categories, but this lower spending was completely offset by resiliency in Target's household essentials, food and beverage, and beauty merchandise categories. That explains how comparable-store sales remained flat in the quarter. And along with added sales from new store locations, this is what propelled Target's total sales slightly higher for the quarter.
The company's non-GAAP (generally accepted accounting principles) adjusted diluted earnings per share (EPS) fell by 4.8% year over year to $2.05 during the first quarter. Elevated interest expenses from soaring rates and higher selling, general, and administrative expenses led its net margin to contract by 30 basis points to 3.8% in the quarter. A lower share count couldn't completely counteract Target's reduced profitability, which is why adjusted diluted EPS growth trailed total sales growth for the quarter.
Analysts anticipate that the company's adjusted diluted EPS will surge by 93% from $6.02 last fiscal year to $11.62 by its fiscal year ending January 2026 -- still below its adjusted diluted EPS of $13.56 in 2021. This is because as inflationary cost pressures subside, Target's profitability is expected to gradually recover to levels observed before runaway inflation occurred.
Image source: Getty Images.
The dividend can keep growing
Target's 3.3% dividend yield is very appealing when stacked up against the S&P 500 index's 1.5% yield. And with its quarterly dividend per share rocketing higher by over 150% in the past 10 years, the company has delivered respectable dividend growth as well.
TGT Dividend data by YCharts
Target's dividend payout ratio is poised to come in at approximately 53% for its current fiscal year ending in January. This is still within reason for a retailer, but higher than usual for the company. That's why I believe dividend growth will come in light for at least another year. But beyond that point, Target could be positioned to return to healthy dividend growth as its payout ratio reverts to a more normalized level.
A bargain blue chip stock
Near-term headwinds like theft-driven inventory shrink and a challenging economic environment have not been kind to Target stock: Shares of the retailer have slumped 19% in the past three months. This has pushed the stock's forward price-to-earnings (P/E) ratio down to just 13.2, which is well below the discount store industry's forward P/E ratio of 23.2. This is why I believe the retailer is a buy for dividend growth investors willing to wait a couple of years for a rebound in its fundamentals.
