Monday, January 13, 2014

Stock Bought: TGT

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.

20 comments:

  1. Hi DGM,

    it´s not easy to find a company which is trading under the fair value!
    On my watchlist with 153 companies, TGT is on place 28! :-)
    I think TGT is definitely a very good purchase!

    regards
    D-S

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    1. D-S: Thanks! I agree, Target is one of the few companies trading at or below fair value at the moment.

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  2. DGM,

    Great buy here. I think TGT is attractive.

    You got in a better price than I did. I think you'll do well over the long haul with this one, especially as operations in Canada improve.

    Best wishes!

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    1. DM: Thank you -- I noticed that TGT was also included in your latest trio of stock picks. Once the security breach is behind them and the Canadian operations get smoothed out, I think the company will see a resumption of consistent earnings growth.

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  3. Hi DGM, Yes that is good, was guessing you would have purchased MCD today as noted in prior comments the hint was within your target price. Well I am suspecting Mr Market will continue to provide more opportunities to keep adding to the positions already in the portfolio in the coming months.

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    1. DivInv: I'm watching MCD closely -- it's trading around the same price as my last purchase. I might wait and see whether I can buy more shares at a cheaper price (allowing me to average down), but my decision will also depend on what other opportunities are available. PM is looking quite attractive now, for example.

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  4. Been eyeing Target myself the past week or so, and think a move might be in the works. The current negativity is noise, and just providing an investment opportunity. I am also looking at UL and MCD as other possible options.

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    1. w2r: I think quite a few dividend growth investors are looking closely at Target and are willing to adopt a long-term view of the company. Like you, I am also looking at MCD at the moment. I glance at UL from time to time, but I think I would need to see a better valuation before I would give more consideration to a purchase.

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  5. I bought some yesterday too. Guessing we'll be averaging down sometime this year, but who knows. I got 20 at $62, bought a little too early in the day.
    -RBD

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    1. RBD: Good move on your TGT purchase, too. If the stock price continues to decline, then I am open to the possibility of another purchase, but I would probably wait until I can average down by a reasonable amount (at least 2%).

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  6. It's had 2 downgrades, price targets cut, and at least one class action lawsuit announced. While I applaud most of your purchases, wouldn't PM or KMP be a much better use of spare cash as both of those yield substantially more and have a lot more price appreciation potential as well? gawilley from Seeking Alpha

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    1. gawilley: Thanks for your comment. Quite frankly, analyst downgrades and price target cuts mean almost nothing to me. Analysts are routinely wrong about the stocks they cover and they may have unstated agendas, so I take their actions with a large grain of salt.

      I consider a wide range of opportunities when making investment decisions. In fact, I'm closely watching PM right now and thinking about adding to my position. As for KMP, I prefer the related KMI, but it's already my largest position, so I am hesitant to add more shares.

      I decided to buy TGT because I view it as an attractively valued long-term investment. It has a lower yield than other stocks, but I avoid making decisions based solely on yield differences. As for price appreciation potential, one could argue that TGT has plenty of potential. Its earnings are temporarily depressed due to the Canadian expansion and may take a hit due to lawsuits, but I think it's important not to let short-term issues mask the long-term outlook for the company, which I think is positive. Of course, I might be wrong in my judgment about TGT, but I suppose that's what makes the stock market an active market.

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    2. Very well said, and I hope that your call turns out to be right. I was also speaking to you from being a TGT shareholder myself - so I had the proverbial skin in the game. But, once the bad news continued to build - and the estimates lowered, not just by ANALysts, but by the mouth of TGT themselves, the prudent thing seemed to sell and look elsewhere - which is why I took the TGT money and bought into PM. I am also thinking that BAX is looking pretty darned good as well... Good luck with everything and I look forward to future blog posts from you.

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    3. From gawilley: This was posted today:

      Target downgraded to Underperform at Cowen, firm expects buyback suspension • 9:24 AM
      • Shares of Target (TGT) dip 0.9% pre-market after Cowen downgrades shares to Underperform with a $47 PT (implying a downside of 22% from Friday's close).
      • Cowen observes, "we expect the company to suspend its buyback, a key support for the stock, indefinitely."

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    4. From gawilley: And let me just be clear, I'm not trying to rain on anyone's parade here. I am a fellow DGI just like you guys - and the previous post is just to share info in case any who are following the blog hadn't seen/heard this news yet. With regards to other posts you've made about WMT, I too am evaluating adding a bit more here as it's come down.

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    5. Anonymous, buy when others are fearful. I've made eight very decent moves in doing just that. I hope TGT is the ninth.

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    6. Anonymous: Even if Target does suspend its stock buyback (which is merely speculation from that analyst), I continue to think the company has positive long-term prospects. If the stock price continues to decline, then I will likely increase my position further.

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  7. DGM,

    I really like the purchase. I just picked up some TGT today at $59.98. I think a year from now all the fuss over the security issues will be forgotten. I am also start to look closely at WMT because it is quickly becoming undervalued as well.

    DP

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    1. Pipeline: Nice purchase at a great price! I'm also looking at WMT and thinking of buying some shares to make it about equal-weight with my TGT position.

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  8. I was waiting for that price on Friday but was pulled away for a meeting about the time it dipped. My purchase price was a wee bit north of $60. Taking solace in Common Stocks point re: quibbling. (FYI, I came across this blog researching TGT).

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