When it comes to stocks that can jump fivefold in the next five years, Target (TGT +1.32%) may not be near the top of your list. Recency bias likely takes some of the blame. Despite the discount retailer rising in recent months, the shares are still trading nearly 20% lower over the past three years and more than 40% below where they were five years ago.
However, a new CEO, a long record of dividend hikes, and the chain's historical all-weather appeal can deliver market-thumping gains over the next decade. Let's play out the bullish scenario where Target is a five-bagger by 2036.
Image source: Getty Images.
It starts with a turnaround
CEO Michael Fiddelke just started his reign in January, and he's not phoning it in. He's targeting four areas for improvement:
- Merchandising authority
- Elevating and differentiating the shopping experience
- Advancing technology
- Investing in Target's teams and communities
It's not just aspirational rhetoric. The retailer is targeting $2 billion in incremental spending on store renovations and operational improvements. Target's guidance calls for net sales rising 2% this year, a figure that may seem unimpressive until you consider that it has had three consecutive fiscal years of slight top-line declines. Net sales were positive in February -- the first month of the new fiscal year -- so Target is already off to a strong start before the 10-figure turnaround strategy gets going.
NYSE: TGT
Key Data Points
It continues with a beating drum of dividends
Target stock may not seem like royalty in recent years, but it does wear a crown. Target is a Dividend King, boosting its quarterly distributions for 54 consecutive years. And there's a good chance that this streak will be at 64 years come 2036.
You can argue that rising gas prices, the war in Iran, and inevitable economic headwinds in the next decade will challenge its stay on the payout throne. But have you seen what Target has been through in the last 54 years?
- The Black Monday market crash of 1987
- The Great Recession, triggered by the subprime lending crisis in 2007
- The COVID-19 pandemic sucker punch of 2020
- More recently, declining net sales for the last three fiscal years
Target has weathered all of these storms and more and continues to serve up annual dividend hikes. Even with the stock's recent bounce, it still yields a healthy 3.6%. Despite sluggish performance in recent years, Target's payout ratio remains a very manageable 55%.
The company has enough dry powder to keep its income investors close as it invests in wooing growth investors back into its business. It's a good place to be for Target. Even if just some of the new initiatives work, it should boost sales while also improving the chain's margins.
The stock is trading at less than 16 times the midpoint of this year's earnings guidance, a deep discount to the country's largest retailer. Sales won't jump fivefold in the next five years. They don't have to. Widening profitability and accelerating sales will lead to the market gladly paying a market premium for Target again.
It's time to go shopping.
