In the span of just 52 weeks, Target (TGT 2.46%) has traded as low as $87.35 per share and as high as $167.40 per share. Unfortunately for investors, Target is hovering around the low end of that range at about $95 per share at the time of this writing.
The sell-off in Target stock, paired with decades of dividend raises, has pushed Target's dividend yield up to a hefty 4.7%. Here's why Target is a dividend stock worth doubling up on in May, even though its challenges are far from over.
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Target just slashed its guidance
On its latest earnings call, Target blamed weakening consumer confidence and tariffs on top of an extended period of inflation as reasons for its poor results. Target's first-quarter net sales were down 2.8% due to lower traffic. Target held or gained market share in 15 out of its 35 merchandising divisions. However, its goal is to grow market share across the majority of its assortment. On its first-quarter earnings call, Target said it was not satisfied with its first-quarter performance.
Target CEO Brian Cornell said the following in Target's earnings press release:
While our sales fell short of our expectations, we saw several bright spots in the quarter, including healthy digital growth, led by a 36% increase in same-day delivery through Target Circle 360, and our strongest designer collaboration in more than a decade, Kate Spade for Target. While these highlights reinforce our confidence in the underlying health of our business, we're not satisfied with current performance and know we have opportunities to deliver faster progress on our roadmap for growth.
Although Target expressed accountability for the poor results and a plan for returning to growth, the company's updated guidance indicates the pain is far from over. Less than three months ago, Target forecast fiscal 2025 adjusted earnings per share of $8.80 to $9.80, net sales growth of around 1%, and a modest increase in operating margins compared to fiscal 2024. Now, Target is guiding for just $7 to $9 in fiscal 2025 adjusted EPS and a low single-digit decline in sales.
What makes Target's significant guidedown even worse is that Target is coming off fairly weak comps in fiscal 2024 -- a year in which it grew comparable sales by just 0.1%, traffic by 1.4%, and booked $8.86 in adjusted EPS compared to $8.94 in fiscal 2023 adjusted EPS.
Target's poor results are reflected in its flatlining sales growth and weak operating margins, which were rebounding nicely off their pandemic lows but have since stagnated.
TGT Revenue (TTM) data by YCharts
The silver lining is that Target's sales and earnings are still above pre-pandemic levels. And yet, its stock price is hovering around a six-year low -- indicating that investors have little confidence in Target's turnaround. The good news is that Target's valuation already reflects these concerns.
Target can afford its sizable dividend
Despite its weak results, Target is still a highly profitable company that can fund its growing dividend and its long-term growth efforts in new store openings, existing store remodels, technology, and supply chain improvements.
The midpoint of Target's forecast adjusted EPS guidance of $8 per share is significantly higher than its $4.48 per share dividend payment. Typically, when a company is undergoing a turnaround and has a growing dividend, the dividend expense begins to balloon to a point where the company can barely afford it. But that isn't the case with Target. This is a company that has paid and raised its dividend for 53 consecutive years -- making it part of an elite group of companies known as Dividend Kings that have raised their payouts for at least 50 years.
Over the decades, Target has raised its payout year after year, whether the economy was contracting or expanding. Even now, its dividend is affordable and sports a 4.7% yield.
However, one of the best reasons to buy Target is for its valuation. Target would have a price-to-earnings (P/E) ratio of just 11.9 based on the midpoint of its adjusted fiscal 2025 earnings forecast and the stock price at the time of this writing of around $95 a share. That's a bargain-bin price for an established company like Target. For context, Target's 10-year median P/E is 15.6.
Target has fallen far enough
Target continues to overpromise and underdeliver, so it's understandable why investors have grown impatient with the company. However, Target's valuation suggests it is facing an existential crisis -- and that's far from the case.
Target needs a new strategy focused on leaning into what it does best, which is in-store experience, rather than trying to go toe-to-toe with Walmart and Amazon on value. Promotions are yet another way to differentiate Target from the competition. Target has had resounding success with partnerships in the past. Even in the latest quarter, Target's collaboration with Kate Spade was the most successful limited-time partnership Target has had in over a decade.
In sum, Target has a clear path toward regaining its mojo. The stock is worth doubling up on in May for investors looking to buy a turnaround stock and generate passive income. However, some investors may prefer to keep Target on a watchlist until the company can prove its strategic initiatives translate to bottom-line results.
