On the surface, 2023 has been a great year for the stock market. But many of those gains have been concentrated in certain sectors, such as tech and communications, and in mega-cap stocks that carry a lot of weight in the indexes.
Many consumer-facing companies have been hit hard by declines in discretionary spending, rising interest rates, and fears of prolonged inflation.
Starbucks (SBUX 0.47%), Nike (NKE 0.19%), and Target (TGT 0.18%) are three blue chip dividend stocks that are down 5.3%, 15.8%, and 26%, respectively, over the last six months despite an 11.3% gain for the S&P 500. Here's what makes each stock worth buying now.
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1. Starbucks: Executing its strategy to perfection
Starbucks is one of those companies that seems to always have something not going its way. Not long ago, it was sluggish growth. Then, Starbucks expanded aggressively into China, which backfired during the U.S.-China trade war. The worst period was the COVID-19 pandemic's height, as customers abandoned their commutes and travel. Even now, Starbucks continues to face unionization challenges as it struggles to compromise with workers on fair pay.
When a company is as large and well-known as Starbucks, it's hard to have everything go right. The good news is that Starbucks is executing what matters most -- its long-term growth strategy. It's banking on the Starbucks Rewards program and mobile order and pay, paired with a lineup of drinks centered around iced beverages. And it's working, especially in Starbucks' key markets (the U.S. and China).
Starbucks Rewards has more than 75 million 90-day active members. Most of the company's new stores are smaller outside of North America. In fact, Starbucks has fewer North American stores today than it did before the pandemic.
Starbucks can grow its sales in two key ways: Building more stores, or generating more sales per store. Its old strategy was mostly based on building more stores. Today's approach is far more efficient and leaner. It centers around producing a higher volume of expensive drinks per store, which is spearheaded by rewards and mobile purchases.
Starbucks is at the top of its game, and it's finally executing the strategy that many investors have been waiting years to see come to fruition. The stage is set for Starbucks' next growth phase. The only issue is that Starbucks is an expensive stock, with a forward price-to-earnings (P/E) ratio of around 28.
2. Nike: Direct shows no signs of slowing
Nike is putting up impressive results, including record-high sales. However, margins are down as Nike clashes head-on with a conservative consumer and inflation.
The good news is that Nike has an ace in the hole that's a coiled spring for long-term growth -- Nike Direct.
Nike has not sat idly by and watched e-commerce disrupt the retail industry. In fact, Nike stands to gain from shifting sales away from brick-and-mortar wholesale toward online and mobile.
Similar to Starbucks Rewards, Nike Direct is a way for Nike to better engage with customers by tailoring marketing toward their preferences. From promotions, to sales, and new product lines, Nike Direct is the perfect way for Nike to get more from its top customers.
In the last five years, Nike Direct grew from a 30.1% share of total revenue to a 41.6% share. So while the majority of Nike's business is still wholesale, it would be a mistake to overlook the role that Nike Direct is playing.
Nike isn't at the top of its game. But it does have a good long-term strategy. Margins should improve with time. And there's nothing about the short term that would affect Nike's long-term investment thesis.
Like Starbucks, Nike stock isn't cheap --- fetching a 26.8 forward P/E ratio. But it's a reliable company that's putting the right pieces in place to ensure long-term growth.
3. Target: Stock has fallen far enough
By far the most troubled company on this list is Target. Its stock is hovering around a three-year low and recently was down a staggering 53.7% from its all-time high. Target is a prime example of what can go wrong if a company is caught flat-footed in a crisis.
After a record 2021 and 2022, Target overestimated consumer discretionary spending and built up its inventory. Part of that was due to supply chain challenges that extended lead times and forced retailers to guess even further into the future. Target guessed wrong.
The consequence was a collapse in net income and Target's operating margin. Steep discounts did the necessary but painful task of reducing inventory at the expense of Target's bottom line. But the company is keen on not making the same mistake twice. It's heading into the second half of the year with a lean inventory and is positioned to react if consumer spending is better than expected instead of scrambling to move products off the shelves.
A silver lining is that Target is having success engaging with customers through Target Circle, its rewards program. Target Circle now has over 100 million members. Similar to Starbucks Rewards and Nike Direct, it's Target's way of engaging with customers by offering discounts, promotions, and rewards.
Target stock has suffered a brutal and somewhat warranted sell-off. Unlike Starbucks and Nike, Target stock is now inexpensive, with a forward P/E ratio of just 16.3. Target also just raised its dividend to a record high, and sports a 3.6% dividend yield.
Long-term investing done right
Starbucks, Nike, and Target are all focusing on what customers want, which is to save time and money. Each may be in a different stage of its pandemic recovery. But all three are top brands with excellent business models that are built to last. Each company continues to get better at directly engaging with customers, which bodes well for long-term growth.
Investing in equal parts of each stock produces an average dividend yield of 23.7 (around the S&P 500's average P/E) and a dividend yield of 2.4% (better than the S&P 500's average of 1.5%). Starbucks, Nike, and Target are stocks you can build a portfolio around and are all worth looking at amid the sell-off.
