Target (TGT +2.43%) is one of the largest retailers in the United States. It is a Dividend King and has a lofty 4.7% dividend yield. If you have a contrarian bent, you might want to buy this out-of-favor retailer today. If you wait until some future tomorrow, you might miss out on the opportunity.
Here are three reasons why you shouldn't get too caught up in today's bad news.
1. Target's situation isn't as bad as it looks
Target is a giant retailer with nearly 2,000 stores across the United States. In the third quarter alone, it generated $25 billion in revenue. This is a very substantial business.
Image source: Getty Images.
That said, revenue was off by 1.5% year over year, and same-store sales were down 2.7%. Those aren't great numbers, but they don't indicate that shoppers have totally abandoned the company. It is more of an indication that Target is out of step with current consumer trends (more on this below).
Meanwhile, the trailing 12-month dividend payout ratio is approximately 50%. There's no question that Target is not hitting on all cylinders right now, but the car is still running. Sure, it's running a little rough, but that's different from a car that's rusting out in the backyard.
2. Target is moving to fix what ails it
The point is really that Target's engine needs some fine-tuning, not a complete overhaul or replacement. To that end, the board of directors has taken action. It recently brought in a new CEO to breathe some fresh air into the company's approach. The management team, meanwhile, has announced an all-hands-on-deck call, with a team created to help focus the turnaround effort.
This is what you would expect a company to do when it faces hard times. Note that even well-run companies face hard times, eventually. The best companies find a way to deal with the inevitable headwinds they face. If history is any guide, Target will weather the current storm. That's highlighted by the over five decades worth of annual dividend increases this Dividend King has provided to its shareholders.
NYSE: TGT
Key Data Points
A company can't build a dividend history like that by accident. It requires a strong business plan that gets executed well in both good times and bad. Now is a bad time, and the company is making the types of choices you would expect a good company to make.
3. Target's approach is likely to come back into favor again
One of Target's biggest problems right now is likely the shift in consumer buying habits. Rising costs have customers tightening their purse strings. That's a significant benefit for companies focused on selling at low prices, like Walmart and Dollar General. However, Target's approach is to offer a more upscale shopping experience.
A nicer shopping experience costs more to create. Nicer products cost more to buy. It isn't that Target is a high-end retailer, but for consumers who are trying to pinch pennies, trading down to value retailers is an easy budgeting solution. Target will likely lean into value, but it can't avoid its more premium image.
Data by YCharts.
This isn't the first time something like this has happened; the leadership in the retail industry often shifts based on consumer buying trends. It is highly likely that, eventually, consumers will return to Target's stores in a move to trade back up to a more desirable shopping experience.
Target is a turnaround story
There is no way to sugarcoat it: Target is struggling compared to its closest peers. It recognizes that fact and is working on a turnaround. There is no overnight fix. And yet, if you wait too long, you may find you have missed the opportunity to buy a Dividend King while it has a historically high yield. You'll need to have a contrarian bent to buy Target, but if you do, history suggests it could be the type of stock you want to load up on while other investors are running for the exits.
