Is it time to buy target stocks for a high return of 3%?
target (TGT 1.55%) Investors have had a tough year, with shares of the retail giant falling 8.8% over the past year. The decline stands in stark contrast to: S&P 500, which is up nearly 28% over the past 12 months. Target’s revenue lagged industry peers such as: walmart (WMT 0.26%) and costco wholesale (expense 0.75%) By a big margin.
This performance gap reflects weakening customer traffic trends for the company as shoppers shift their spending away from discretionary purchases such as home furnishings. It’s difficult to increase sales when you serve fewer guests quarter after quarter.
But Target’s growth problems may be coming to an end soon. And as investors await a rebound, unusually high dividend yields are available in the retail industry. Let’s take a look at a few reasons why income investors might want Target stock at the top of their watchlist.
Could there be a better holiday season for Target?
The retailer is scheduled to release holiday quarter earnings results in March, and there’s reason to be cautiously optimistic about that update. That’s because Costco and Walmart each announced accelerated holiday quarter sales growth, confirming shoppers are spending more freely through the end of 2023.
Costco’s latest report was especially encouraging because it showed increased demand in the consumer discretionary sector, which has been under significant pressure recently. This niche is Target’s most important segment, and even a slight bounce here could put the chain on the cusp of a profit revival.
Comparable-store sales declined 5% in the third quarter (ending Oct. 28, 2023), and management forecast fourth-quarter results to be in the wide range at the same rate. Most Wall Street experts expect reported profits to rise slightly this quarter, perhaps ending the chain’s long sales decline.
Most Financial Wins in 2023
The news about Target’s finances is even more decidedly positive. Cash flow surged in 2023 as the company focused on efficiency and reduced inventory in slow-moving merchandise categories. Prices also rose in other regions, with gross profit margins reaching 27% through the first three quarters of 2023 (compared to 24% a year ago). Target’s operating profit improved from 3.5% of sales to 5.1% of sales, approaching the pre-pandemic level of 6%.
TGT cash from operations (TTM) data from YCharts
The good news is that this rebound is occurring even amid weak demand in the consumer discretionary niche. Growing there again could then make it easier for Target to grow its margins while also giving management more resources it can use to increase its dividend.
cash refund
A key operational metric to watch in 2024 will be customer traffic. Because Target absolutely needs to regain growth in this area. However, low inventory and strong profitability and cash flow all indicate that the dividend is likely to increase significantly when the chain announces its annual payment (usually in June). Last year’s increase was just 2% as management decided to shift towards conserving more cash.
The good news is that Target has raised its dividend for the past 52 consecutive years, and its current yield of 2.9% is significantly higher than Walmart’s 1.3% and Costco’s 0.6%. Most investors will want to keep watching this stock for now until there are concrete signs that Target has put its customer traffic slump behind it in fiscal 2024. That’s the retailer’s clearest path to a profit rebound and higher shareholder returns from here.
