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Better Buy: The Home Depot, Inc. vs. Target

By Dan Caplinger - Apr 25, 2016 at 10:17AM

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Which of these big-box retailers is the smarter pick right now?

Image: Home Depot.

Retail's evolution toward larger store footprints reached its peak before the rise of e-commerce, but big-box stores still have a major presence in the industry. The Home Depot (HD 2.19%) has revolutionized the way homeowners and professional contractors get the supplies and materials they need, having become the largest retailer of home-improvement goods in the nation. Target (TGT 1.13%) has taken a more general approach, offering its department-store format in a way that tries to cater both to shoppers looking for discounts and to those wanting a bit more style than some of its peers give their customers. Investors looking at these two major retailers want to know which stock is the better buy right now. Let's compare Home Depot and Target on several important measures to see which one looks more favorable.

Stock performance and valuation
In terms of recent share-price performance, Home Depot has a strong lead over Target over the past year. Since April 2015, Home Depot has given its investors a 22% total return. Target has given its shareholders only a 3% total return over the same period.

The relative popularity of the two stocks shows up when you look at simple valuation metrics. In comparing the price of the two companies' shares to their trailing earnings, Target comes out as the cheaper buy. Target shares currently fetch about 15 times trailing earnings, compared to a much loftier 25 times earnings for Home Depot.

When you incorporate growth projections into the mix, the valuation disparity narrows considerably. Looking at forward earnings estimates, Home Depot's valuation falls to just 19 times forward earnings. However, Target still has a considerable advantage with a forward earnings multiple of 14. Based on valuation, Target's recent lagging stock price appears to be offering a better deal than Home Depot to investors.

Looking at dividends, Target also comes out ahead of Home Depot in some key areas. Target currently sports a dividend yield of 2.7%, which is greater than the 2% current dividend yield that Home Depot offers. Both companies pay out just over 40% of their earnings in the form of dividends to their shareholders, and so the disparity comes from the valuation differences discussed above.

Target has also established a better track record of ongoing dividend growth than Home Depot has. Target's streak of annual dividend increases stretches back for 48 years, with its most recent increase last August amounting to 8%, paying shareholders $0.56 per share on a quarterly basis. Home Depot has given investors an even bigger 17% raise in their dividend in 2016, but its history of dividend boosts isn't as reliable as Target's. By this measure, Target beats out Home Depot.

Where Home Depot shines, though, is in its growth prospects looking forward. Comparable-store sales growth of close to 9% in its most recent quarter shows just how big of an impression the company has made in the home-improvement space, and its strategy of catering both to professional contractors and do-it-yourselfers has paid off in the again-booming housing market. Earlier this month, Home Depot's Spring Black Friday event highlighted the importance of the spring season to the retailer, and 11 days of in-store and online sales helped give customers a big incentive to get started on their home-improvement plans. As part of its longer-term strategy toward giving customers the widest possible array of products to choose from and ways in which to buy those products, Home Depot has built up a lot of positive momentum.

Target, on the other hand, has had a lot more difficulty in growing at a solid pace. Investors were actually excited when the department-store retailer managed to post a 1.9% increase in comparable sales over the holiday season, and much of that came from a 34% leap in e-commerce-related sales. Growth in key areas like kids, style, baby, and wellness has exceeded the rest of Target's departments, validating new CEO Brian Cornell's decision to emphasize the four categories as growth drivers. Yet Target has less of a competitive defense against online retail specialists than Home Depot, and that has required Target to turn to partnerships with fashion designers to give itself exclusivity and build up excitement about its products. Growth is likely to be slower at Target than Home Depot.

Target has some things going for it that other department stores don't, and so for those who value dividends and more reasonable valuations, Target stock will look like a justifiably appealing proposition. High-growth investors will prefer to stick with Home Depot and its more considerable path to future success.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$296.03 (2.19%) $6.34
Target Corporation Stock Quote
Target Corporation
$219.73 (1.13%) $2.46

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