Having already made two purchases for my Roth IRA in November, I did not plan on buying anything else this month. However, Mr. Market came knocking on my door this morning with an opportunity that I decided to jump on.
Today I bought shares of Target Corporation (TGT), operator of over 1,800 retail stores selling general merchandise in the United States and now Canada. Target is generally viewed as a more upscale version of its largest competitor, Wal-Mart Stores (WMT).
Target has achieved satisfactory operating results over the past several years, with 5-year growth rates of 3.0% for revenue and 6.3% for earnings. Recent growth has been slowed by Target's expansion into Canada, where it has encountered some difficulties, but I think the company will overcome these short-term growing pains within a year or two. Target's financial position is decent, with a debt/equity ratio of 91%, debt/cap ratio of 45%, 6.9x interest coverage, and a current ratio of 0.9. Value Line gives the company a financial strength rating of A and a safety rating of 2.
Target has an impressive dividend growth record. The company is a Dividend Champion, having increased its dividend for 46 consecutive years. The 5-year dividend growth rate is 20.5% and the most recent increase was 19.4% in August 2013. With a payout ratio of 41% and stable cash flows, I think the dividend can continue to grow in spite of short-term earnings weakness. The company has also excelled at share repurchases, reducing the number of outstanding shares by about 28% since 2004.
I think TGT is slightly undervalued to fairly valued at the current price. It has a P/E of 15.3 (vs. a 5-year historical average of 13.6), P/S of 0.6 (vs. 0.5), P/B of 2.5 (vs. 2.4), and dividend yield of 2.7% (vs. 1.8%). Note that these numbers have not been updated to reflect the results reported by the company earlier today. 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 $70.07. Morningstar gives a fair value of $64.00 and a 3-star rating. S&P Capital IQ gives a fair value of $73.20 and a 4-star rating. The average of those three estimates is $69.09, which implies an 8% margin of safety at my purchase price, hence my conclusion that the stock is slightly undervalued to fairly valued. Today the stock price dropped 3.5% because the company missed earnings and revenue estimates for the latest quarter, but as noted above, I regard this as short-term weakness. Value Line's analyst expects earnings to "ramp up at a solid pace" starting in fiscal 2014 and S&P Capital IQ sees above-average growth from fiscal 2015 onward.
I bought 30 shares of TGT at the price of $63.70 per share (no commission paid due to a free trade -- my last one), giving me a 2.70% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $12.90 from this purchase, which will add a total of $51.60 to my annual dividend income. The stock went ex-dividend a few days ago, so I will not receive the next dividend payment. However, my lower cost basis due to today's price dip is equivalent to about 6.5 quarterly dividend payments, which more than compensates for the missed payment. This purchase was made in my Roth IRA using rollover money. Target becomes the 33rd stock in my portfolio and gives me more diversification in the retail sector, where it is approximately equal-weight with my WMT position. My forward 12-month dividend total increases to $3,282.
I am tempted to say that I am done buying stocks for the month, but Mr. Market could surprise me again. In case you are wondering, I noticed the sell-off in PM today and the after-hours sell-off in ROST, both of which are stocks in my portfolio. I already have a fair-sized position in PM, though, and ROST would need to fall further to become attractively valued, so I do not plan on adding to those positions right away.
I like this purchase. The dividend growth looks great and it is a fantastic company to shop at. I need a retailer, a drug company, and a food company to continue my diversification. I am kicking myself for not buying Walmart a month ago when it was around 72.
I have one more purchase to make this month and I can't decide between TGT, CAG, KRFT, and CPB. Good luck with your purchase.
SE: Thanks for your comment. I've watched TGT for several months but kept passing on it. The target price I had in mind was around $64, so when I saw today's early dip, I felt compelled to take advantage of it.Delete
I haven't looked closely at CAG, CPB, or KRFT. My favorites in the food space are GIS and HRL, but their valuations aren't good right now.
I love the purchase. I wish my timing was as good as yours, but I'm slightly comforted by knowing I at least got in before the next dividend in December. However, it wasn't a particularly good trade-off.
I think TGT will compliment your other retailer holdings nicely. :)
DM: Thank you! I'm happy to join you as a fellow new TGT shareholder.Delete
I think every investor sometimes makes untimely purchases; at least, I know I've had my share of them. The key is to maintain a long-term view in spite of short-term price fluctuations. The price at which we each bought TGT will not matter in 5 or 10 years. I actually have to check my portfolio spreadsheet to find out the prices of some stocks I bought two years ago, which goes to show how quickly such things can be forgotten.
Good price, solid entry yield for the retailer, and certainly plenty of room for growth in the future. I like the purchase, and the missed dividend is definitely an afterthought for sure.ReplyDelete
w2r: Thanks! Once the Canadian expansion stabilizes, I think we'll see some nice earnings growth (and continued dividend growth) from TGT.Delete
Very good buy. Out of all the companies I follow, only TGT, BAX and TEVA are undervalued based on average dividend yield. I'm looking to add more TGT to my portfolio so I was happy to see a dip today.ReplyDelete
ADY: Thanks! You're right, TGT is quite attractive when the current yield is compared with the historical average.Delete
Haha, nice buy here! Wow I see you've been on tilt and are in the middle of a massive shopping spree. TGT, O, CVX, and KMI are nice picks says the guy who owns all of them. I would argue that those particular companies are some of the only ones left still trading at attractive prices.ReplyDelete
CI: I'm happy to get some chances to put my rollover money to work. It's good to see you also got a piece of TGT on the same day. I agree that it's slim pickings for attractively valued stocks nowadays.Delete
I saw that earnings miss and wondered who was going to pounce! Wasn't me, but I definitely thought hard about it. I am pausing here for a little while.
RBD: Yep, a few investors like me pounced on the opportunity. However, TGT might remain attractively valued for a while yet; for example, I could have got a slightly better entry price today.Delete
I like the purchase. The lower price more than makes up for the missed dividend as you mentioned. With the recent dip I may decide to add a little more next week. I'm not seeing a lot of value in this market so I don't mind going a little overweight on a solid company with plenty of room for growth like TGT.ReplyDelete
AAI: I know you've been buying TGT lately; it's one of the few decent opportunities in the market at the moment. I think it's fine to go overweight on a stock in the short term. Considering how much new capital you invest on a regular basis, other investments will eventually reduce the weight of any particular stock in your portfolio.Delete
I picked up some TGT also a few months ago. I love how unloved it is b/c of expansion. The dip makes no sense in terms of long term growth.ReplyDelete
Evan: I agree. TGT is an example of a stock where you need to look past short-term struggles and focus on long-term growth potential. I think INTC also falls into that category.Delete
Target is on my Watchlist ranked 26thReplyDelete
I will buy the company also - but not before the year 2014.
Before that purchase I have great interest in Franklin Recources and Lockheed Martin.
D-S: Thanks for your comment. I've looked at Lockheed Martin in the past, but I feel I already have enough exposure to defense via my positions in GD and UTX. I haven't looked at Franklin Resources. Best wishes as 2013 comes to a close!Delete
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