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Better Buy: Wal-Mart Stores Inc. vs. Target

By Dan Caplinger - Mar 30, 2016 at 10:54AM

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Which big-box retail stock is a better deal right now? Find out here.

Image: Wal-Mart.

The retail industry has gone through huge challenges in recent years, and the threat of online retail has forced big-box giants Wal-Mart (WMT 0.08%) and Target (TGT 2.46%) to adapt. Yet the companies have had to deal with different pressures, and their responses have led to disparate performance in their stocks. Investors who are interested in the retail world are curious whether Wal-Mart or Target is the better buy right now. Let's compare Target and Wal-Mart on several key metrics to see which looks more attractive currently.

Wal-Mart and Target have seen their shares move in different directions over the past year, reflecting their relative success. Target has risen 4% since March 2015, but Wal-Mart has lost ground over that time period, falling 15%.

It would be natural to assume that the divergence in share-price movements might have created a value opportunity for Wal-Mart. But based on simple valuation metrics, that doesn't appear to be the case. When you focus on trailing earnings, Wal-Mart shares currently trade with an earnings multiple of 15, and that ends up being very close to the corresponding figure of just under 16 for Target. When you look at forward earnings projections, the relationship reverses itself. Target currently trades at 14 times forward earnings estimates, which is below the 15 to 16 times forward earnings that Wal-Mart fetches right now. On a very basic valuation basis, Target and Wal-Mart look roughly comparable.

Another area in which Target and Wal-Mart compare very closely is with dividends. From a current yield perspective, both stocks are similar, with Wal-Mart's 2.9% yield just barely edging out Target at 2.7%. Both stocks have earnings payout ratios of just over 40%, indicating similar philosophies with respect to dividends.

Both Wal-Mart and Target have also put together impressive track records of dividend growth. Both are members of the Dividend Aristocrats, and Target's 48-year history of consecutive annual dividends is just a bit longer than Wal-Mart's 43-year streak.

The one place where there's a big discrepancy is in the pace of recent dividend growth. Since 2013, Wal-Mart has made minimal penny-per-share increases in its quarterly dividend, amounting to roughly 2% increases that have the appearance of being token moves for the sake of extending its streak. By contrast, Target's recent increases have been 8%, 21%, and 19% over the past three years. Based on that key measure, Target has a slight edge in the dividend category.

The key issue that Target and Wal-Mart both face is how they can grow from here. So far, Wal-Mart's efforts haven't had the results that investors have wanted to see. The retailer made huge investments in the recent past, including massive wage increases and improvements in its e-commerce platform to try to stand up to online retail rivals. Yet in its most recent quarter, comparable sales in the U.S. were up just 0.6%, and even the typically faster-growing e-commerce channel posted gains of only 8%. That has Wal-Mart losing market share on the digital front, and the decision to end its Wal-Mart Express experiment with smaller store formats shows just how much difficulty the retailer has had in identifying ways to boost its business.

Target, on the other hand, has had a much better time recently with its business. Online sales grew at a whopping 34% pace in its holiday quarter, and that even outgrew some e-commerce specialists in the industry. Integrating inventory with in-store pick-up capabilities paid off for Target, and the company is investing more in developing its online presence. Overall, comps were up just 1.9%, but that performance reflected solid efforts to balance promotional activity with margin support. More importantly for the future, Target projected earnings growth for 2016 that should exceed its long-term 10% growth goal, and that helped build enthusiasm for the stock.

Given Wal-Mart's challenges, it's surprising to see so little difference in valuation and dividend metrics compared to Target. For those who expect Target's competitive advantages to persist, its stock makes a better buy than Wal-Mart based on current conditions.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$123.72 (0.08%) $0.10
Target Corporation Stock Quote
Target Corporation
$150.42 (2.46%) $3.61

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