With a dividend yield of 3.3%, Target (NYSE:TGT) is putting its best foot forward. The business is deeply invested in giving back to its shareholders, but its cash position is starting to suffer. That's two sides of the same coin, and depending on what you're looking for in a dividend payer it could be good or bad news. The best dividends are the ones that put up solid growth and get paid out on a regular basis -- Target's got one of those nailed.
Sales have been the biggest problem for the company, as it tries to put last year's data breach behind it. So far, things haven't gotten back to business as usual. Heading into the all-important holiday season, Target is still looking a little shaky, and that's going to mean less cash to give back to investors. Here are the two keys that any dividend focused buyer need to know.
Target will prioritize dividends
If you're worried about getting that check in the mail, Target should help you sleep soundly at night. The company has been paying out a dividend like clockwork for almost 16 years. Over that time, Target has made it clear that paying out a dividend is high on its list of things to do. Even with sales fluctuations, the business has managed to hit its payout.
Last year, for instance, Target's revenue fell 1% with earnings per share getting slammed. Even so, Target has bumped up its dividend this year, paying out $0.52 per share next quarter, up from $0.43 per share last year. That rising dividend is a matter of pride for Target, and on the company's most recent conference call, it called out the fact that it had increased annual payouts every year since 1971.
For investors, that's good news. A rising payout, consistent payouts, and a company that's unlikely to stop paying all make for a good dividend player. The problem with Target is that it could start losing out on growth due to its zealous payouts. Cash is supposed to be returned to investors when the individuals can do better with it than the business. Target's flat sales, brand issues, and fumbling stock all point to a business that would be better off investing in itself.
Don't expect huge dividend growth
For all of the reasons above, it's likely that Target is going to have to take its foot off the accelerator a bit over the next few years. That's not to say that the dividend is going to stop being paid or stop growing, but the rate of that grow has to slow.
Last year, the company generated free cash flow of just $364 million, after removing $2.7 billion in proceeds from the one-off sale of its credit card accounts. It also paid out $1 billion in stock and spent another $1.46 billion on stock repurchases. Even if that $2.7 billion was recurring, that would be an untenable situation.
Dividend growth is going to have to slow a bit in order for the company to invest some cash back in its own brand and operations without draining the coffers. Obviously, the share repurchase plan is helping to stem the bleeding from future dividends, but Target is still having a hard time figuring out when enough is enough.
Eventually, it will figure that out. When it does, dividends are going to slow a bit, buybacks are going to take a little time off, and dividend investors are going to have to languish for a time. That's not the end of the world, but it's something that everyone who's investing in Target for its dividend needs to be aware of.
If Target can get its brand back on track and make something out of this year's holiday season, there may be rosier times ahead. For right now, though, Target investors might want to look elsewhere for a more sustainable situation.
Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.