Kings don't always receive royal treatment. Dividend Kings certainly don't. Target (TGT 0.58%) provides a great example.
Shares of the giant retailer have plunged close to 40% below the high set in October 2024. Some investors have run for the hills. However, there's a case to be made for not overthinking the difficulties that Target faces and just buying the beaten-down stock.
An off-target Target
Target hasn't hit the bullseye very much lately. The company's first-quarter sales slipped nearly 3% year over. Its earnings were well below expectations. Executives said during the Q1 earnings call that they weren't satisfied with the performance four times. Even worse, Target slashed its full-year earnings guidance and expects sales to decline by a low single-digit percentage.
What's going on? Some of the problems are largely outside of Target's control. For example, inflation has put pressure on discretionary spending. Consumer confidence declined for five consecutive months this year.
President Trump's tariffs create more issues for the entire retail sector. Target is no exception. Many of the products the company sells are imported. While Target has significantly decreased its reliance on products made in China, the level is still around 30%.
Target is responsible for one major headache, though. Management announced earlier this year a rollback of several diversity, equity, and inclusion (DEI) initiatives and a new "Belonging at the Bullseye" strategy for "creating a sense of belonging for our team, guests and communities." This decision sparked a major backlash, including a consumer boycott. Target CEO Brian Cornell briefly acknowledged the pushback in the Q1 earnings call, saying that one of the headwinds the company faces was "the reaction to the updates we shared on belonging in January."
Better news for the beaten-down retailer
However, there is some better news for the beaten-down retailer. For one thing, management isn't trying to sweep the company's problems under the rug. Target established an "acceleration office" led by COO Michael Fiddelke. The purpose of this group will be to facilitate faster decision-making and execution of strategic initiatives to return to growth.
Much of what made Target one of the most successful retailers in the world for years remains in place. Many of the brands offered in its stores remain popular with customers. Target's partnership with Kate Spade was a big hit.
Image source: Target.
The company continues to make solid progress on reducing inventory shrinkage and improving productivity. These efforts should help offset some of the pressures on profits.
Target appears to have a good strategy for dealing with tariffs. It's negotiating with vendors, trying to source from different countries with lower tariff rates where possible, adjusting order pricing, and (as a last resort) increasing prices. Chief commercial officer Rick Gomez thinks that these efforts should "offset the vast majority of the incremental tariff exposure" the company will face.
Then there's the dividend. Target recently announced its 54th consecutive year of dividend increases. Its forward dividend yield stands at 4.67%. Despite the retailer's challenges, it remains in a strong position to continue its impressive streak of dividend hikes with a low payout ratio of 49%.
Don't overthink, just buy
It's easy to overthink Target's problems and overlook its strong points. After all, this is a company that's on track to generate revenue of close to $105 billion this year and deliver solid profits. Target is also, as we've seen, a highly reliable source of dividend income.
We shouldn't leave out the stock's valuation, either. Target's shares trade at only 12.8 times forward earnings.
I expect it will take a while for Target's turnaround to play out. However, I suspect that investors who buy now will enjoy attractive total returns over the long term.
