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Forget Wal-Mart Stores Inc.: Here Is a Better Dividend Stock

By Andrés Cardenal – Mar 27, 2016 at 3:00PM

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This retailer is crushing Wal-Mart in terms of dividend growth.

Wal-Mart (WMT 0.62%) is one of the most-renowned dividend stocks in the market, and for a good reason: The retail juggernaut has an amazing track record of dividend growth over the long term. Wal-Mart paid its first dividend in 1974, and it has raised its dividend every year since then, proving that the business is strong enough to deliver consistently growing payments for investors through good and bad economic times.

On the other hand, Wal-Mart is facing a clear slowdown in revenue and earnings lately, and this is being reflected in lackluster dividend growth. For this reason, investors looking for a rock-solid dividend stock in the retail industry may want to pick Target (TGT -1.22%) instead.

Some key numbers
Like Wal-Mart, Target offers an immaculate trajectory of dividend growth, and this speaks volumes about the company's soundness and its ability to reward shareholders with consistently growing dividends through all kinds of scenarios. Target paid its first dividend in October 1967, and it has paid uninterrupted dividends for 195 consecutive quarters since then. In addition, the company has increased dividends over the last 44 consecutive years in a row.

Both companies have conservatively low payout ratios in comparison to earnings, so investors don't have many reason to be concerned about dividend sustainability. Wal-Mart pays a quarterly dividend of $0.50 per share. This represents nearly 48% of earnings forecasts for the current fiscal year. As for Target, a quarterly dividend of $0.56 accounts for 42% of forecasted earnings.

In terms of dividend yield, the two companies are also fairly similar. Wal-Mart stock pays a dividend yield of 2.9% at current prices versus 2.7% for Target. On the other hand, Target leaves Wal-Mart in the dust when it comes to dividend growth during the last several years.

Since 2014, Wal-Mart has raised dividends by an uninspiring $0.01 per share every year, including the latest dividend increase announced in February of 2016. This is a lackluster 2% increase in payments. Target has raised dividends by an impressive average growth rate of 20% in the last five years, and the latest dividend increase from the company was a vigorous 7.7%, announced in June of 2015.

Wal-Mart and Target have many similarities. The two companies have delivered consistent dividends over the decades They have safely low dividend-payout ratios, and their dividend yields are almost identical. Nevertheless, Target is delivering far-superior dividend growth, and this is a crucial factor to keep in mind when making investment decisions.

How Target is beating Wal-Mart
Dividend policy says a lot about the health of a business and the degree of confidence management has in its ability to sustain healthy financial performance in the future. If the company believes it's on the right track to delivering solid revenue and earnings growth, then this will probably be reflected on strong dividend increases. On the other hand, if the outlook for sales and earnings is uncertain, then management could feel more inclined to protect financial resources by increasing dividends at a slow rate. 

In a nutshell, the main reason why Target is crushing Wal-Mart in terms of dividend growth is that the company is also doing much better in terms of sales and earnings, especially on the back of superior performance in e-commerce, a crucial growth segment in the industry nowadays.

Wal-Mart announced a lackluster increase of 0.6% in comparable-store sales during the quarter ended on January 31, 2016. The constant-currency increase in e-commerce sales was a disappointing 8%. This is considerably below growth potential in e-commerce, and it even represents a deceleration versus a 10% increase in the previous quarter.

Guidance for the current fiscal does not provide much reason for hope. Wal-Mart is expecting revenue during fiscal 2017 to be relatively flat versus fiscal 2016, and earnings per share are forecasted to be between $4.00 and $4.30. This would represent a year-over-year decline of 6% to 12%. This means that Wal-Mart's dividend growth will probably remain under pressure over the middle term. 

Target reported a healthier 1.9% increase in comparable-store sales last quarter. Traffic increased 1.3% year over year, and online was a major growth driver during the period, because e-commerce sales jumped 34% versus the same quarter in the prior year. Adjusted earnings per share increased by more than 11% during the quarter, and management is forecasting adjusted earnings per share to increase by 11% to 15% in the coming year.

As long as Target continues outperforming Wal-Mart in e-commerce, the company looks well positioned to continue delivering superior performance in sales, earnings, and dividends, too. For this reason, Target looks like a better choice than Wal-Mart for dividend investors.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Stocks Mentioned

Walmart Stock Quote
$153.37 (0.62%) $0.95
Target Stock Quote
$165.03 (-1.22%) $-2.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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