Today I bought shares of Target (TGT), operator of over 1,800 retail stores selling general merchandise in the United States and now Canada. My most recent previous purchase of TGT was in November 2013. The stock price has floundered recently after the company revealed in December that hackers had stolen credit/debit card data and personal information of millions of customers. While this kind of security breach is embarrassing and a PR nightmare, I view it as a short-term problem that will eventually fade away. For example, TJ Maxx shows no lasting ill effects of a massive security breach revealed in 2007 that affected the credit/debit card data of over 45 million customers. I expect that Target will recover from the current debacle in due course.
I think TGT is slightly undervalued at the current price. It has a P/E of 16.4 (vs. a 5-year historical average of 13.6), P/S of 0.5 (vs. 0.5), P/B of 2.4 (vs. 2.4), and dividend yield of 2.8% (vs. 1.8%). The current P/E ratio is a bit misleading because earnings have been hurt in recent quarters due to Target's struggles with its expansion into Canada. Using a Dividend Discount Model with a dividend growth rate of 10% (half of the 5-year historical rate) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $67.65. Morningstar gives a fair value of $64.00 and a 3-star rating. The average of those two estimates is $65.83, which implies a 6.6% margin of safety at my purchase price.
I bought 25 shares of TGT at the price of $61.50 per share plus commission, giving me a 2.78% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $10.75 from this purchase, which will add a total of $43.00 to my annual dividend income. This purchase was made in my Roth IRA using rollover money and I was able to reduce my cost basis by 1.6%. I now have a total of 55 shares of TGT and I will receive combined quarterly dividends of $23.65. My forward 12-month dividend total increases to $4,015.